Order Code RL34374
Estate Tax Legislation in the 110th Congress
February 14, 2008
Nonna A. Noto
Specialist in Public Finance
Government and Finance Division

---

Estate Tax Legislation in the 110th Congress
Summary
Under provisions of the Economic Growth and Tax Relief Reconciliation Act
of 2001 (EGTRRA, P.L. 107-16), the estate tax exclusion is scheduled to continue
to rise, from $2 million for decedents dying in 2008, to $3.5 million in 2009. The
estate tax is repealed for decedents dying in 2010 only. The gift tax is to remain in
place in 2010. In addition, when the estate tax is repealed, there is scheduled to be
a significant change in the method used to determine the “basis” of all capital assets
transferred at death — from “step-up in basis” to “modified carryover basis.”
Whatever basis-valuation rule is in effect for the year of death applies to all capital
assets transferred after any person’s death, whether or not their estate is large enough
to be liable for the estate tax.
The estate tax provisions of EGTRRA are scheduled to sunset at the end of
2010. That explains why the repeal of the estate tax is currently scheduled to last for
only one year. If Congress does not change the law beforehand, on January 1, 2011,
estate and gift tax law will return to what it would have been had EGTRRA never
been enacted. The unified estate and gift tax will be reinstated with a combined
exclusion of $1 million. The maximum tax rate will revert (from 45% in 2007-2009)
to 55%. These large year-to-year differences in the estate tax law mean that wealthy
individuals face a wide and erratic variation in their potential estate tax liability over
the next four years, 2008-2011, depending upon the year they might happen to die.
Following EGTRRA, the House passed a bill to permanently repeal the estate
tax in each of the past three Congresses, but the Senate did not pass any legislation
addressing the estate tax. In addition, in the second session of the 109th Congress, the
House passed two bills that would have modified and retained the estate tax.
Thus far in the 110th Congress, seven bills to permanently repeal the estate tax
have been introduced in the House and four in the Senate. Seven bills to retain but
modify the estate tax have been introduced in the House and one in the Senate. The
repeal bills differ on whether or not they would preserve the other changes made by
EGTRRA to the taxation of gifts and the basis for inherited assets. The modification
bills differ on the level of the exclusion, what year it would take effect, whether or
not it would be indexed for inflation, and whether any unused exclusion could be
carried over to the estate of the surviving spouse. They also differ on the tax rates,
whether special relief would be given to family-owned farms or businesses, and
whether the gift tax would be defined separately from or unified with the estate tax.
The U.S. Treasury Department’s February 2008 estimates show the annual
revenue loss from total repeal of the estate tax rising steadily from $58 billion in
FY2012, up to $84 billion in FY2018. Even though estate and gift taxes account for
less than 2% of federal revenue, permanent repeal of the estate tax accounts for one
quarter of the estimated revenue loss of the Bush Administration’s FY2009 budget
proposal to make permanent the group of tax cuts enacted in 2001 and 2003,
measured over the 10-year forecast period, FY2009-FY2018. This report will be
updated when new estate tax bills are introduced and when new revenue loss
estimates become available.

---

Contents
Underlying Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Current Law: The Economic Growth and Tax Relief
Reconciliation Act of 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Main Differences Among the Bills in the 110th Congress . . . . . . . . . . . . . . . . . . . 5
Bills to Permanently Repeal the Estate Tax . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Preserving Other Changes Made by EGTRRA: The Taxation of Gifts
and the Use of Modified Carryover Basis for Inherited Assets . . . 6
Part of Fundamental Tax Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Extending Other Tax Cuts Made in 2001 and 2003 . . . . . . . . . . . . . . . 8
When Permanent Repeal Would Take Effect . . . . . . . . . . . . . . . . . . . . 8
Bills to Retain a Modified Version of the Tax . . . . . . . . . . . . . . . . . . . . . . . . 9
Repeal of Elements of EGTRRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Exclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Tax Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Special Treatment for Family-owned Businesses and Farms . . . . . . . 10
Treasury Department Estimates of Revenue Loss from Permanent Repeal . . . . 11
Bills Introduced in the 110th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
House Bills to Repeal the Estate Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
House Bills to Modify and Retain the Estate Tax . . . . . . . . . . . . . . . . . . . . 15
Senate Bills to Repeal the Estate Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Senate Bills to Modify and Retain the Estate Tax . . . . . . . . . . . . . . . . . . . . 19
Appendix. Legislative Activity in Prior Congresses,
from 2000 through 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Preceding EGTRRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Remainder of the 107th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
The 108th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
The 109th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
List of Tables
Table 1. Estate Tax Exclusion and Approximate Tax on a
Taxable Estate of $4 Million, 2008 to 2011 and Beyond . . . . . . . . . . . . . . . 1
Table 2. Treasury Department Estimates of Revenue Losses from
Permanent Repeal of the Estate Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

---

Estate Tax Legislation in the 110th Congress
Underlying Issues
There are several reasons why Congress might address the estate tax sooner
rather than later. The law governing the estate tax over the next four years is highly
erratic. The applicable exclusion amount (popularly known as the exemption) under
the estate tax is $2 million for people who die in 2008. The exclusion is scheduled
to rise to $3.5 million in 2009. The estate tax is repealed for people who die in 2010
only. Then, because the current law governing the estate tax is scheduled to sunset
on December 31, 2010, the estate tax is set to be reinstated in 2011, with an exclusion
of $1 million per person for 2011 and beyond.
This results in dramatic variations in the potential estate tax liability, depending
upon which year a wealthy person might happen to die. As shown in Table 1, the
approximate estate tax due on a taxable estate of $4 million, for example, would be
$900,000 if the owner died in 2008, $225,000 in 2009, $0 in 2010, and $1,495,000
in 2011 and subsequent years. It is difficult for individuals and families to do long-
term tax planning for their estates under a law which contains such large year-to-year
differences. There is uncertainty about the law that may govern in future years.
Table 1. Estate Tax Exclusion and Approximate Tax on a
Taxable Estate of $4 Million, 2008 to 2011 and Beyond
Year of
Estate Tax
Approximate Tax on a Taxable
Death
Exclusion
Estate of $4 Milliona
2008
$2 million
$900,000
2009
$3.5 million
$225,000
2010
No estate tax
$0
2011 and
$1 million
$1,495,000
beyond
Source: Tax liability calculated by CRS. See CRS Report RL33718, Calculating Estate Tax
Liability: 2001 to 2011 and Beyond, by Nonna A. Noto.
a. The taxable estate is equal to the gross estate (the aggregate value of assets) minus eligible
deductions (including administrative expenses of the estate, state death taxes, debts, charitable
bequests, and transfers to the surviving spouse). The tax liability is described as approximate
because other items could affect the final calculation. For example, not taken into account here
are gift taxes that may already have been paid on lifetime taxable gifts and foreign taxes paid
on the estate.

---

CRS-2
Such large differences in anticipated estate tax liability could even influence the
timing of deaths, or at least the officially recorded date of death.1 Indeed, there is
evidence that when Australia eliminated its estate tax on July 1, 1979, “Over half of
those who would have paid the estate tax in its last week of operation managed to
avoid doing so.”2 Taking this evidence into account, Congress may choose to address
the estate tax well before the tax is repealed on January 1, 2010, and before the estate
tax provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001
sunset on January 1, 2011.
Bills addressing the estate tax generally fall into one of two categories: those
that permanently repeal the tax; and those that retain the tax, but modify it. Here are
some of the hotly debated claims commonly made by opponents and proponents,
respectively, of the estate tax.
Supporters of permanently repealing the estate tax maintain that the tax:
! reduces savings and investment, thereby reducing long-term
economic growth;
! is a form of double taxation, taxing money that has already been
subject to the income tax;
! leads wealthy individuals to undertake economically unproductive
efforts and expenses in order to reduce their potential tax liability;
and
! unduly burdens family farms and businesses3 and penalizes
successful entrepreneurship.
Supporters of maintaining the estate tax argue that the tax:
! does not significantly discourage saving and investment;

! is an important component of a progressive tax system;
! is needed to break up the concentration and dynastic transmission of
wealth;
! is a backup for capital gains taxes not collected on the increase in
asset values during a decedent’s lifetime;
! encourages charitable bequests;
! generates revenue that helps reduce the federal budget deficit; and
1 Wojciech Kopczuk and Joel Slemrod, “Dying to Save Taxes: Evidence from Estate-Tax
Returns on the Death Elasticity,” Review of Economics and Statistics, vol. 85, no. 2 (May
2003), pp. 256-265.
2 Joshua Gans and Andrew Leigh, “Toying with Death and Taxes: Some Lessons from
Down Under,” Economists’ Voice, June 2006, pp. 1-3. Available at
[http://www.bepress.com/ev].
3 Two reports prepared for Congress concluded that very few estates containing farms or
small businesses did not have sufficient liquid assets to pay the estate tax that may have
been due. U.S. Congressional Budget Office, Effects of the Federal Estate Tax on Farms
and Small Businesses, July 2005, cites evidence from estate tax returns filed in 1999 and
2000. CRS Report RL33070, Estate Taxes and Family Businesses: Economic Issues, by
Jane G. Gravelle and Steven Maguire, cites evidence from estate tax returns filed in 2003.

---

CRS-3
! can help states levy estate or inheritance taxes.4
If the choice is to repeal the estate tax, questions still remain as to whether assets
transferred at death should have a carryover basis or step-up in basis and whether
there should be a gift tax. The definition of basis has important implications for the
capital gains tax liability of heirs when they sell an inherited asset. The presence of
a gift tax protects the income tax but discourages the transfer of assets during a
person’s lifetime.
If the choice is to retain the estate tax but modify it, there are numerous design
elements to consider. In addition to setting the level of the exclusion, there are the
questions of whether the dollar amount should be indexed for inflation and whether
any unused exclusion should carry over to the surviving spouse. To date, little
attention has been given to the tax rate structure. Is it important to have a schedule
of several graduated tax rates instead of just one or two rates at a high level? Should
the thresholds between the rate brackets be indexed for inflation? Should the estate
tax rate be established on its own, or should it be set in terms of another tax rate, such
as the income tax rate on long-term capital gains? Should there be special treatment
for family-owned farms and businesses? Should there be a credit or deduction for
state death taxes? Should there also be a gift tax and, if so, should it be separate from
or unified with the estate tax? It may also be appropriate to design an estate tax that
is consistent with income tax policy toward saving and toward income from
investments. The underlying economic question is: What is the optimal way to tax
assets transferred at death?
Current Law: The Economic Growth and Tax Relief
Reconciliation Act of 2001
Title V of the Economic Growth and Tax Relief Reconciliation Act of 2001
(EGTRRA, P.L. 107-16, enacted June 7, 2001) gradually phased out the estate tax
by raising the “applicable exclusion amount” or “exemption” under the estate tax, in
large increments. The exclusion increased from $675,000 in 2001 before EGTRRA,
to $1 million for decedents who died in 2002 or 2003, $1.5 million for 2004 or 2005,
and $2 million for 2006-2008. The exclusion is scheduled to rise one last time, to
$3.5 million in 2009. Then the estate tax and generation-skipping transfer (GST) tax
are repealed for 2010 only, because the provisions of EGTRRA sunset on December
31, 2010. The gift tax is to remain in place in 2010, with a cumulative lifetime
exclusion amount of $1 million and with a maximum marginal tax rate of 35% (this
is equal to the highest rate for the individual income tax in 2006 and thereafter under
EGTRRA).
In addition, when the estate tax is repealed in 2010, there is scheduled to be a
significant change in the method used to determine the “basis” of capital assets
transferred at death — from “step-up in basis” to “modified carryover basis.” The
4 For further discussion of these arguments, see CRS Report RL30600, Estate and Gift
Taxes: Economic Issues, by Jane G. Gravelle and Steven Maguire.

---

CRS-4
basis is the “cost” of a capital asset that is subtracted from the sales proceeds in order
to calculate the “capital gain” that is subject to income tax after an asset is sold.5
Under the law in place through 2009, and scheduled to resume in 2011, a step-
up in basis rule applies to assets transferred at death.6 Under this rule, the cost basis
of an asset is set at the value of the asset on the decedent’s date of death.7 If the heir
sells the asset, his or her capital gain is calculated as the difference between the sales
price and the stepped-up basis, not the decedent’s original purchase price (which is
called the carryover basis). The effect of this practice is to permanently forgive the
income tax liability on the increase in value of the asset (the capital gain) during the
decedent’s period of ownership.8
The estate tax is sometimes defended as a substitute for the capital gains tax at
death.9 Consistent with this argument, an important tradeoff that EGTRRA made for
the repeal of the estate tax in 2010 was the return to a carryover basis for assets
transferred at death.10 However, two important exceptions were made. In what is
called a modified carryover basis, an aggregate step-up in basis of $1.3 million per
decedent11 is permitted in the original adjusted basis of assets transferred at death
($60,000 for nonresident aliens). An additional step-up of up to $3 million is
permitted for assets transferred to a surviving spouse. (These dollar amounts are
indexed for inflation.12 ) The executor of the estate is left with the task of allocating
the step-up allowance to specific assets.
These basis offsets apply to the net increase in value of the assets, not the gross
value of the assets. Thus, the $1.3 million step-up might cover all the gains in a gross
5 For a detailed explanation, written before EGTRRA was enacted, see CRS Report
RL30875, Step-Up vs. Carryover Basis for Capital Gains: Implications for Estate Tax
Repeal, by Nonna A. Noto, April 20, 2001.
6 IRC Section 1014, relating to the basis of property acquired from a decedent.
7 Or the value may be determined as of the alternate valuation date, six months after the date
of death, if that value is lower.
8 For an asset that has decreased in value since the decedent purchased it, such as an
automobile, or stocks or real estate after a decline in the market, the stepped-up basis can
be lower than the original cost. As a consequence of the step-up in basis rule, the loss in
value during the decedent’s period or ownership cannot be claimed as a capital loss when
an inherited asset is sold.
9 For a discussion of this tradeoff, written prior to the enactment of EGTRRA, see CRS
Report RL30875, Step-Up vs. Carryover Basis for Capital Gains: Implications for Estate
Tax Repeal, by Nonna A. Noto, April 20, 2001.
10 For property acquired from someone dying after December 31, 2009, the basis for the
person acquiring the property is to be the lesser of (1) the adjusted basis of the decedent or
(2) the fair market value of the property at the date of the decedent’s death. Under both
prior law and EGTRRA, property transferred by gift has a carryover basis.
11 This limit may be increased by the amount of unused built-in losses and loss carryovers
that the decedent may have had.
12 The minimum increments are $100,000 for the $1.3 million amount, $6,000 for the
$60,000 amount, and $250,000 for the $3 million amount.

---

CRS-5
estate valued at $2 million or $3 million or more. The spousal step-up of $3 million
alone could cover the gains in an estate with a gross value of $4 million or $5 million
or more. The practical effect of these two exceptions to carryover basis is to
maintain a step-up in basis for smaller estates.
Note that whatever basis-valuation rule is in effect for the year of death applies
to all capital assets transferred after any person’s death, whether or not their estate
is large enough to be liable for the estate tax.
As mentioned above, the estate tax repeal, and all other provisions of EGTRRA,
are scheduled to sunset at the end of 2010.13 If Congress does not change the law
beforehand, on January 1, 2011, estate and gift tax law will return to what it would
have been had EGTRRA never been enacted. The unified estate and gift tax will be
reinstated with a combined exemption of $1 million.14 The special deduction for
qualified family-owned business interests (QFOBI) will be restored, with a value of
$1.3 million in combination with the applicable exclusion amount. The maximum
tax rate will revert (from 45% in 2007 through 2009) to 55%, with a 5% surtax on
taxable estate values over $10.0 million and up to $17.184 million. Step-up in basis
will again be the rule.
Main Differences Among the Bills in the 110th
Congress
A variety of bills to either repeal or modify the estate tax have been introduced
in the 110th Congress. A brief summary of each bill is presented in a later section of
this report. This section discusses the bills grouped according to their major
distinguishing characteristics.
13 Title IX or Section 901 of EGTRRA states that the provisions of the act do not apply after
December 31, 2010. The text of the sunset clause is as follows:
TITLE IX — COMPLIANCE WITH CONGRESSIONAL BUDGET ACT
Sec. 901. Sunset of Provisions of Act.
(a) IN GENERAL. — All provisions of, and amendments made by, this Act
shall not apply —
(1) to taxable, plan, or limitation years beginning after December 31, 2010, or
(2) in the case of title V, to estates of decedents dying, gifts made, or generation
skipping transfers, after December 31, 2010.
(b) APPLICATION OF CERTAIN LAWS. — The Internal Revenue Code of
1986 and the Employee Retirement Income Security Act of 1974 shall be applied
and administered to years, estates, gifts, and transfers described in subsection (a)
as if the provisions and amendments described in subsection (a) had never been
enacted.
14 The Taxpayer Relief Act of 1997 (P.L. 105-34) provided for an “applicable exclusion
amount” or exemption of $1 million for 2006 and beyond.

---

CRS-6
Bills to Permanently Repeal the Estate Tax
The bills to permanently repeal the estate tax differ in four main ways. One is
whether or not they would preserve the other changes made by EGTRRA to the
taxation of gifts and inherited assets. A second is whether the extension of estate tax
repeal is part of a broader effort to extend the income tax cuts enacted by the
Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16) and the
Jobs and Growth Tax Relief and Reconciliation Act of 2003 (P.L. 108-27). A third
is whether the repeal of the estate tax is part of a fundamental tax reform effort to
replace the income tax and possibly the payroll tax with some form of consumption-
based tax. A fourth is when permanent repeal would take effect.
Preserving Other Changes Made by EGTRRA: The Taxation of Gifts
and the Use of Modified Carryover Basis for Inherited Assets. Some bills
to permanently repeal the estate and generation-skipping transfer (GST) taxes take
the approach of repealing the sunset provision of EGTRRA with respect to Title V.
These bills would thereby also preserve the other changes to the taxation of gifts and
bequests made by EGTRRA. Among these changes are the modified gift tax and the
modified carryover basis (instead of a step-up in basis) for assets transferred at death.
H.R. 411 (Mario Diaz-Balart) and H.R. 2380 (Hulshof) would remove the sunset
provision of EGTRRA.
Other bills to permanently repeal the estate and GST taxes take the approach of
repealing Subtitle B of the Internal Revenue Code of 1986 (Estate and Gift Taxes).
These bills would allow EGTRRA to sunset. This would have the effect of repealing
other changes made by EGTRRA to parts of the Internal Revenue Code other than
Subtitle B, such as the modified carryover basis treatment of assets transferred at
death. Repealing Subtitle B would repeal the gift tax, in addition to repealing the
estate tax and the generation-skipping transfer tax. The step-up in basis treatment for
assets acquired from a decedent would remain as provided in Subtitle A (Income
Taxes) of the Internal Revenue Code. H.R. 25 (Linder), H.R. 1040 (Burgess), H.R.
1586 (Thornberry), H.R. 5105 (Dreier), S. 1025 (Chambliss), S. 1040 (Shelby), S.
1081 (Specter), and S. 2547 (Bond) would all repeal Subtitle B.
Still another approach to permanently repealing the estate tax is to amend the
U.S. Constitution. H.J.Res. 23 (Paul) proposes an amendment that would prohibit
Congress from levying taxes on personal incomes, estates, and gifts. This would
repeal not only the estate and gift taxes, but also the individual income tax.
Modified Gift Tax. Under the provisions of EGTRRA a gift tax is retained
even when the estate tax and generation-skipping transfer tax are repealed in 2010.
The main reason given for maintaining the gift tax when the estate tax is repealed is
to protect income tax revenues. The gift tax is intended to discourage people from
giving income-generating or appreciated assets to someone in a lower income tax
bracket and/or with offsetting losses. In the case of appreciated property, the donee
could sell the assets and pay a lower capital gains tax rate than the donor, and then
gift or bequeath the sales proceeds back to the original donor.
If Subtitle B of the Internal Revenue Code (IRC) were repealed, the gift tax
would be repealed along with the estate tax and GST tax. H.R. 25 (Linder), H.R.

---

CRS-7
1040 (Burgess), H.R. 1586 (Thornberry), H.R. 5105 (Dreier), S. 1025 (Chambliss),
S. 1040 (Shelby), S. 1081 (Specter), and S. 2547 (Bond) would all repeal Subtitle B.
The gift tax would also be repealed under the constitutional amendment proposed in
H.J.Res. 23 (Paul).
If, instead, the sunset clause of EGTRRA were repealed, the gift tax — as
modified by EGTRRA — would remain in effect after 2010. The cumulative
lifetime exclusion amount for any one donor would be $1 million.15 This amount is
not indexed for inflation. Beyond that, gifts up to $500,000 would be subject to the
same marginal tax rate schedule that had previously applied to both gifts and
bequests, with marginal tax rates from 18% to 34%. Starting in 2010, when the
estate tax is repealed, and continuing thereafter, the top gift tax rate would be capped
at 35% on cumulative lifetime taxable gifts over $500,000. (This is in contrast to a
maximum tax rate of 45% on gifts or bequests in 2007 through 2009.) The 35% rate
was equal to the maximum tax rate on individual income scheduled by EGTRRA for
tax year 2006 and subsequent years.16 The modified gift tax would continue after
2010 under H.R. 411 (Mario Diaz-Balart) and H.R. 2380 (Hulshof).
If the provisions of EGTRRA are permitted to sunset and we return to prior law,
the unified estate and gift tax exclusion would be $1 million. The maximum estate
and gift tax rate would return to 55% for taxable gifts and bequests combined (with
a 5% surtax over the $10.0 million to $17.184 million range).
Modified Carryover Basis at Death for Capital Gains Purposes. If
the sunset provision were repealed with respect to Title V of EGTRRA, then the
modified carryover basis rules introduced by EGTRRA would continue in effect after
2010 when the estate tax is permanently repealed. H.R. 411 (Mario Diaz-Balart) and
H.R. 2380 (Hulshof) would remove the sunset provision of EGTRRA.
If EGTRRA is permitted to sunset, then the tax law would revert to the step-up
in basis rules found in Subtitle A, section 1012 of the Internal Revenue Code. The
return to step-up in basis would also hold if the estate tax were permanently repealed
by repealing Subtitle B of the Internal Revenue Code, with no accompanying changes
in the basis rules. H.R. 25 (Linder), H.R. 1040 (Burgess), H.R. 1586 (Thornberry),
H.R. 5105 (Dreier), S. 1025 (Chambliss), S. 1040 (Shelby), S. 1081 (Specter), and
S. 2547 (Bond) would all repeal Subtitle B.
Part of Fundamental Tax Reform. Several of the bills to implement
fundamental tax reform would repeal the estate and gift taxes. Proponents generally
15 This lifetime exclusion is in addition to the annual exclusion available for gifts of up to
$12,000 in 2008 (indexed for inflation) per donor per donee (IRC section 2503(b)). There
is also an exclusion from the gift tax for qualified transfers of payments for tuition or
medical expenses on behalf of another individual (section 2503(e)) or transfers to political
organizations, as defined in section 527(e)(1), for use by those organizations (section
2501(a)(4)).
16 For a fuller explanation of the gift tax provisions of EGTRRA, see CRS Report RL31061,
Estate and Gift Tax Law: Changes Under the Economic Growth and Tax Relief
Reconciliation Act of 2001, by Nonna A. Noto, January 29, 2002.

---

CRS-8
indicate that the intent of these proposals is to favor savings and investment relative
to consumption.17 Repealing estate and gift taxes is theoretically consistent with a
consumption-based tax system. Under such a system, bequests and gifts would be
taxed not when transferred or received, but only when the proceeds are spent by
recipients.
Companion bills H.R. 25 (Linder) and S. 1025 (Chambliss) would repeal the
estate and gift taxes, along with the income, self-employment, and payroll taxes.
These taxes would be replaced with a national sales tax.
Five bills would restructure the income tax, in addition to repealing the estate,
gift, and generation-skipping transfer taxes. H.R. 1040 (Burgess) would offer each
individual and business taxpayer the opportunity to irrevocably elect to be taxed
under a flat-rate income tax, instead of the regular income tax and alternative
minimum tax. S. 1040 (Shelby) would repeal the alternative minimum tax and all
income tax credits; it would replace the current income taxes with a flat tax on
individuals and businesses. S. 1081 (Specter) would replace the current income tax
with a flat tax on the taxable earned income of individuals and on business taxable
income. Companion bills H.R. 5105 (Dreier)/S. 2547 (Bond) would establish an
alternative income tax system, based on “simplified taxable income” taxed at three
marginal tax rates; each taxable year a taxpayer could elect to pay according to either
this alternative income tax system or the regular income tax.
H.J.Res. 23 (Paul) proposes an amendment to the Constitution that would repeal
the sixteenth amendment to the Constitution and thereby deny Congress the power
to levy personal income taxes, along with estate and gift taxes.
Extending Other Tax Cuts Made in 2001 and 2003. Permanent repeal
of the estate tax could be part of a broader bill to make other tax cuts permanent. The
Bush Administration’s budget for FY2009 once again proposes to make permanent
the tax cuts enacted in 2001 (P.L. 107-16) and 2003 (P.L. 108-27). Repealing the
estate tax was just one of those tax cuts.
In addition to permanently repealing the estate tax and generation-skipping
transfer tax, H.R. 411 (Mario Diaz-Balart) would make permanent five individual
income tax provisions which are currently scheduled to expire.18 Companion bills
H.R. 5105 (Dreier)/S. 2547 (Bond) would make all of the provisions of the 2001 and
2003 tax acts permanent by repealing the sunset provisions of those acts.
When Permanent Repeal Would Take Effect. In the bills that remove
the sunset provision with respect to Title V of EGTRRA, the repeal of the estate and
generation-skipping transfer taxes would first take effect in 2010, as scheduled by
17 For more information on these proposals, see CRS Report RL34343, Tax Reform: An
Overview of Proposals in the 110th Congress, by James M. Bickley, and CRS Report 98-529,
Flat Tax: An Overview of the Hall-Rabushka Proposal, by James M. Bickley.
18 These are the deduction for state and local sales taxes; the modifications to the child
credit; marriage penalty relief; the deduction for certain expenses of elementary and
secondary school teachers; and the deduction for tuition and related expenses.

---

CRS-9
EGTRRA. The bills would simply extend the repeal into the years 2011 and beyond.
These bills include H.R. 411 (Mario Diaz-Balart) and H.R. 2380 (Hulshof).
The bills to repeal Subtitle B of the Internal Revenue Code (Estate and Gift
Taxes) would typically take effect earlier. H.R. 1586 (Thornberry) would take effect
upon enactment. H.R. 1040 (Burgess), S. 1040 (Shelby), and S. 1081 (Specter)
would take effect in 2008. Companion bills H.R. 25 (Linder)/S. 1025 (Chambliss)
and H.R. 5105 (Dreier)/S. 2547 (Bond) would take effect in 2009.
The abolition of personal income, estate, and gift taxes under H.J.Res. 23 (Paul)
would not take effect until possibly 2018. The resolution allows seven years for
ratification of the proposed constitutional amendment, plus three years for the
ensuing changes in tax law to take effect.
Bills to Retain a Modified Version of the Tax
A number of bills would retain the estate tax but would modify the tax in
diverse ways. The following discussion highlights the major policy differences
among these bills.

Repeal of Elements of EGTRRA. Most of the bills to modify and retain the
estate tax would repeal the provisions of EGTRRA that repeal the estate and
generation-skipping transfer taxes in 2010 and that replace the step-up in basis with
a carryover basis at that time. Several of the bills would reunify the estate and gift
taxes, thereby subjecting estates and lifetime gifts to the same unified tax credit
(exemption) and the same tax rates; these bills would repeal the separate provisions
of EGTRRA regarding the gift tax. But some of the bills would leave in place the
separate gift tax created by EGTRRA and prevent the sunset provision from
applying.
In addition, under H.R. 3170 (Mitchell), the December 31, 2010, sunset date
would continue to apply to the three subtitles of EGTRRA regarding conservation
easements, modifications to the generation-skipping transfer tax, and the extension
of time for payment of the estate tax. H.R. 3170 also would repeal EGTRRA’s
deduction for state death taxes.
Exclusion. The bills differ on the level of the applicable exclusion amount per
decedent, what year it would take effect, whether or not it would be indexed for
inflation, and whether any unused exclusion could be carried over to the estate of the
surviving spouse.
H.R. 4235 (Lowey) would raise the estate tax exclusion to $3 million upon
enactment. After 2007, the $3 million amount would be indexed for inflation.
H.R. 4042 (McNerney) expects that the estate tax will be repealed in 2010. In
the meantime, it would accelerate the phase-out of the estate tax by raising the
exclusion to $3.5 million in 2008 instead of 2009 as currently scheduled. The $3.5
million figure would be indexed for inflation in 2009. The repeal of the GST tax
would be accelerated to 2008.

---

CRS-10
H.R. 4242 (Pomeroy) would raise the estate tax exclusion to $3 million for 2007
and 2008, and set it at $3.5 million for 2009 and beyond. The exclusion amount is
not indexed for inflation.
H.R. 4172 (Moore) would increase the estate tax exclusion to $3.5 million,
effective in 2008, and index it for inflation each year thereafter.
H.R. 3475 (Capuano) would increase the unified estate and gift tax credit to an
exclusion-equivalent of $5 million per decedent effective in 2010, and index it for
inflation each year thereafter.
H.R. 3170 (Mitchell) would raise the unified estate and gift tax exclusion
amount in annual increments of $250,000, over six years. The exclusion would be
$3.75 million for people dying in 2010 and would reach $5 million for 2015. The $5
million amount would be indexed for inflation each year after 2015. H.R. 3170 is the
only bill to provide that the “deceased spouse unused exclusion amount” could be
carried over to the estate of the surviving spouse.
Tax Rates. Under H.R. 3170 (Mitchell) the rate of tax on the first $25 million
of taxable estate would be equal to the maximum capital gains tax rate in effect on
the decedent’s date of death. The amount in excess of $25 million would be taxed
at twice that rate. The $25 million figure separating the two tax brackets would be
indexed for inflation. Gifts would be subject to the same tax rates.
H.R. 4235 (Lowey) would reduce each of the marginal estate tax rates by 20%
(by one-fifth, not 20 percentage points).
H.R. 4242 (Pomeroy) would “freeze” the maximum estate tax rate at its 2005
level of 47% for taxable amounts over $2 million. The bill would restore the 5%
surtax on taxable amounts over $10 million, up to the estate value sufficient to phase
out the savings from the unified credit (exclusion amount) as well as the graduated
tax rates.
H.R. 4042 (McNerney) would establish 45% as the maximum tax rate for 2008
and 2009 and would remove the references to the 49% and 50% marginal rates in the
Internal Revenue Code.

H.R. 3475 (Capuano) and H.R. 4172 (Moore) would not adjust the tax rates set
by EGTRRA.
Special Treatment for Family-owned Businesses and Farms. Two
bills target benefits to family-owned farms and ranches. Both H.R. 1929 (Salazar)
and S. 1994 (Salazar) would exclude from the gross estate the adjusted value of
qualified farmland that continues in farmland use by a qualified heir, subject to
requirements that gross income from farming contributed over half of the decedent’s
gross income in his last taxable years and/or, in the case of S. 1994, that the qualified
farmland accounted for over half the value of the gross estate.
Effective in 2008, H.R. 4042 (McNerney) would reinstate the qualified family-
owned business deduction (QFOBI, section 2057) that was eliminated by EGTRRA.

---

CRS-11
It would increase the amount of the QFOBI deduction from $675,000 to $8 million.
The $8 million figure would be indexed for inflation in 2009, before the estate tax
is repealed in 2010. H.R. 4042 would introduce a new deduction of up to $2 million
from the value of the gross estate for the adjusted value of the decedent’s principal
residence, under certain restrictions. The $2 million figure would be indexed for
inflation in 2009.
H.R. 4242 (Pomeroy) would not permit a minority discount in the valuation of
a business entity because the transferee does not have control of the entity if the
transferee and members of his or her family have control of the entity.
Treasury Department Estimates of Revenue Loss
from Permanent Repeal
Among the revenue proposals in its FY2009 budget, the Bush Administration
has once again proposed to make permanent most of the tax relief provisions enacted
in 2001 and 2003. This includes making the repeal of the estate tax permanent
beyond calendar year 2010. Table 2 presents the U.S. Treasury Department’s
February 2008 estimates of changes in federal receipts expected each fiscal year from
FY2008 through FY2018 if legislation to repeal the sunset provision of EGTRRA
with respect to the estate and gift taxes were enacted in 2008, to take effect in 2010.
These estimates do not include the reduction in revenue expected as a result of
impending changes made by EGTTRA , namely the increase in the exclusion to $3.5
million for 2009.
According to Treasury Department analysts, the estimated revenue losses for
FY2008 through FY2010, which are modest in size, stem primarily from a projected
decline in gift tax revenues. They are based on the assumption that taxpayers would
immediately begin to reduce taxable gifts during their lifetimes if they knew that the
estate tax would be permanently repealed in 2010.
In addition, it is expected that enactment in 2008 of permanent repeal of the
estate tax (effective in 2010) would modestly affect revenues from the individual
income tax, in two opposing ways, starting right away. First, lifetime charitable
donations and accompanying tax deductions would fall, thereby increasing income
tax revenue. Second, and larger in effect, capital gains realizations by the elderly
would fall as they waited to pass on their assets tax-free after death, thereby
decreasing current income tax revenue. For FY2009 and FY2010 Treasury projected
that net reductions in income taxes would add to the decrease in revenue from gift
taxes. For FY2011 and beyond, the loss in income taxes would add to the decrease
in revenue from estate taxes as well as gift taxes. For the fiscal years when the
effects of estate tax repeal would be fully reflected,19 the Treasury Department
19 The estimators expect that FY2012 would be the first full fiscal year in which revenues
are likely to reflect the repeal of the estate tax beginning in calendar 2010. The estate tax
return is not due until nine months after the date of death. A filing extension of six months
is not uncommon, and longer extensions may be granted for complex returns. The fiscal
(continued...)

---

CRS-12
projected that the annual revenue loss would rise steadily from $58 billion in FY2012
up to $85 billion in FY2018.
Table 2. Treasury Department Estimates of Revenue Losses
from Permanent Repeal of the Estate Tax
Fiscal Year
Millions of Dollars
2008
-422
2009
-2,502
2010
-3,453
2011
-26,409
2012
-57,639
2013
-59,670
2014
-64,670
2015
-69,371
2016
-74,379
2017
-79,285
2018
-84,604
2009-2013
-149,673
2014-2018a
-372,309
2009-2018
-521,982
Source: U.S. Department of the Treasury, General Explanations of the Administration’s Fiscal Year
2009 Revenue Proposals (referred to as the Bluebook), Washington, February 2008, p. 129.
Notes: These estimates are based on the assumption that Congress acts in 2008 to permanently repeal
the estate tax and generation-skipping transfer tax effective in 2010. The estimates include the
projected accompanying loss of individual income tax revenue, in addition to estate and gift tax
revenue, as explained in the text.
a. The second five-year subtotal for FY2014-FY2018 was added by CRS.
According to the Treasury Department’s estimates, repeal of the estate tax
accounts for one-quarter of the revenue losses associated with making permanent the
group of tax cuts enacted in 2001 and 2003, measured over the 10-year forecast
period, FY2009-FY2018 ($522 billion out of $2,185 billion). The projected revenue
loss from permanent repeal of the estate tax is just over half the size of the most
19 (...continued)
year runs from October 1 of the previous calendar year until September 30 of the same-
numbered calendar year.

---

CRS-13
costly component of the package, extending the reductions in marginal individual
income tax rates ($522 billion in comparison to $1,008 billion).20 The large
contribution of estate and gift taxes to the loss of revenues may seem surprising given
that estate and gift taxes account for under 2% of federal revenue.
Bills Introduced in the 110th Congress
Following is a list and brief description of the bills introduced thus far in the
110th Congress regarding the estate tax. For each chamber, the bills are divided into
two groups: first, the bills that would permanently repeal the estate tax, and second,
the bills that would retain but modify the estate tax. To date, the bills introduced in
the House are evenly divided between seven that would permanently repeal the estate
tax and seven that would retain but modify it. In contrast, four bills introduced in the
Senate would permanently repeal the estate tax and one would modify the existing
estate tax by adding special provisions for farms and ranches. The appendix contains
a summary of legislative activity on the estate tax in prior Congresses, from 2000
through 2006.

House Bills to Repeal the Estate Tax
H.R. 25 (Linder). Fair Tax Act of 2007. Introduced January 4, 2007; referred
to the Committee on Ways and Means. Companion to S. 1025 (Chambliss). H.R.
25 would permanently repeal the estate, gift, and generation-skipping transfer taxes
by repealing Subtitle B of the Internal Revenue Code. H.R. 25 would also repeal the
income, self-employment, and payroll taxes. It would replace these taxes with a
national sales tax, with the tax rate set initially at 23% for 2009. These provisions
would take effect January 1, 2009.
H.R. 411 (Mario Diaz-Balart). Introduced January 11, 2007; referred to the
Committee on Ways and Means. H.R. 411 would make permanent six tax provisions
which are scheduled to expire. It would repeal the estate tax by preventing the sunset
provision (Section 901) of the Economic Growth and Tax Relief Reconciliation Act
of 2001 (EGTRRA, P.L. 107-16) from applying to Title V of the Act, which relates
to estate, gift, and generation-skipping transfer taxes. This would permanently repeal
the estate and generation-skipping taxes starting in 2010. It would leave in place the
modified gift tax and modified carryover basis introduced by EGTRRA. The five
other provisions that H.R. 411 would make permanent fall under the individual
income tax. They are the deduction for state and local sales taxes; the modifications
to the child credit; marriage penalty relief; the deduction for certain expenses of
elementary and secondary school teachers; and the deduction for tuition and related
expenses. The provisions of H.R. 411 would take effect January 1, 2007.
H.R. 1040 (Burgess). Freedom Flat Tax Act. Introduced February 14, 2007;
referred to the Ways and Means Committee and the Rules Committee. H.R. 1040
20 U.S. Department of the Treasury, General Explanations of the Administration’s Fiscal
Year 2009 Revenue Proposals (referred to as the Bluebook), Washington, February 2008,
p. 129.

---

CRS-14
would permanently repeal the estate, gift, and generation-skipping transfer taxes by
repealing Subtitle B of the Internal Revenue Code, effective January 1, 2008.
In addition, H.R. 1040 would offer individuals and persons engaged in business
activities the chance to make an irrevocable election to be subject to a flat tax instead
of the regular income tax and alternative minimum tax. The flat tax would be levied
at a rate of 19% for the first two years after its election by the taxpayer, and at 17%
for subsequent years. The income tax provisions would take effect January 1, 2008.
H.R. 1586 (Thornberry). Death Tax Repeal Act of 2007. Introduced March
20, 2007; referred to the Ways and Means Committee. H.R. 1586 would
permanently repeal the estate, gift, and generation-skipping transfer taxes by
repealing Subtitle B of the Internal Revenue Code of 1986, effective upon enactment.
H.R. 2380 (Hulshof). Death Tax Repeal Permanency Act of 2007.
Introduced May 17, 2007; referred to the Ways and Means Committee. H.R. 2380
would permanently repeal the estate and generation-skipping transfer taxes as of
2010 by removing the sunset provision of EGTRRA with respect to the estate tax
provisions. The changes made by EGTRRA to the gift tax and the substitution of a
modified carryover basis for the step up in basis for assets transferred at death would
remain in place. On October 10, 2007, Representative Hulshof introduced language
identical to H.R. 2380 as part of a motion to recommit H.R. 3056, the Tax Collection
Responsibility Act of 2007. The House voted 196-212 to defeat the motion. H.R.
3056 was passed by the House later on October 10.
H.R. 5105 (Drier). The Fair and Simple Tax (FAST) Act of 2008. Introduced
January 23, 2008; referred to the Committee on Ways and Means. Companion to S.
2547 (Bond). H.R. 5105 would repeal the estate and gift taxes by repealing Subtitle
B of the Internal Revenue Code, effective in 2009.
H.R. 5105 would also establish an alternative income tax system, based on
“simplified taxable income” taxed at three marginal tax rates of 10%, 15%, and 30%.
Each taxable year a taxpayer could elect to pay according to either this alternative
income tax system or the regular income tax.
H.R. 5105 would also make changes to the regular income tax system and the
alternative minimum tax. Most of the income tax amendments would take effect in
2009. In addition, H.R. 5105 would make all of the provisions of the 2001 tax act
(P.L. 107-16) and certain individual income tax provisions of the 2003 tax act (Title
I of P.L. 108-27) permanent by repealing the EGTRRA sunset date of December 31,
2010.
H.J.Res. 23 (Paul). Introduced February 7, 2007; referred to the Judiciary
Committee. House Joint Resolution 23 proposes an amendment to the Constitution
that would repeal the sixteenth amendment (which allows Congress to tax incomes
without apportionment). Thereafter, the Congress would no longer tax personal
income, estates, or gifts. The amendment would also prohibit the United States
Government from engaging in business in competition with its citizens. The
resolution allows seven years for ratification of the proposed constitutional
amendment, plus three years for the ensuing changes in tax law to take effect.

---

CRS-15
House Bills to Modify and Retain the Estate Tax
H.R. 1929 (Salazar). Save the Family Farm and Ranch Act of 2007.
Introduced April 18, 2007; referred to the Ways and Means Committee. H.R. 1929
would exclude from the gross estate the adjusted value of qualified farmland that
continues in farmland use by a qualified heir. The provision would apply only if the
decedent’s gross income from the trade or business of farming exceeded 50% of the
decedent’s gross income for three or more of the decedent’s last five taxable years.
In addition, either the decedent or a member of the decedent’s family would have to
have owned and materially participated in the operation of the farmland for periods
aggregating five or more years during the eight years preceding the decedent’s death.
A recapture tax would be imposed if the qualified heir disposes of any interest in the
qualified farmland (other than to a member of his family) or ceases to use the real
property as a farm for farming purposes. These amendments would take effect upon
enactment. H.R. 1929 is similar to S. 1994 (Salazar), with the differences noted in
the summary of that bill below.
H.R. 3170 (Mitchell). Capital Gains and Estate Tax Relief Act of 2007.
Introduced July 24, 2007; referred to the Ways and Means Committee. H.R. 3170
would modify and extend the estate tax after 2009. It would restore the unified credit
for estate and gift taxes. It would raise the combined estate and gift exclusion
amount to $5 million per decedent, in annual increments of $250,000, over six years.
The exclusion would be $3.75 million for people dying in 2010; $4 million in 2011;
$4.25 million in 2012; $4.5 million in 2013; $4.75 million in 2014, and $5 million
for 2015. The $5 million figure would be indexed for inflation each year after 2015.
The inflation-adjusted amount would be rounded to the nearest multiple of $50,000.
For married couples, H.R. 3170 would permit the amount of the per-decedent
exclusion that is not used by the first spouse to die to carry over to the estate of the
surviving spouse.21 H.R. 3170 would repeal the deduction for state death taxes.
The rate of tax on the first $25 million of taxable estate would be equal to the
maximum capital gains tax rate in effect on the decedent’s date of death. The amount
in excess of $25 million would be taxed at twice that rate. The $25 million figure
separating the two tax brackets would be indexed for inflation each year after 2015.
The inflation-adjusted amount would be rounded to the nearest multiple of $50,000.
H.R. 3170 would repeal the provision of EGTRRA that establishes a separate
schedule of graduated rates for the gift tax, capped at 35% after 2009. It would also
repeal the provision that limits the tentative gift tax credit to the exclusion equivalent
of $1 million.
The estate tax provisions of H.R. 3170 would take effect in 2010. All of the
estate tax provisions of EGTRRA are currently scheduled to sunset on December 31,
2010. Under H.R. 3170, the sunset would continue to apply to the three subtitles of
21 This provision was previously introduced in the 109th Congress in H.R. 5638 and again
in H.R. 5970. Both bills were introduced by Representative William Thomas, chairman of
the Ways and Means Committee at the time, and were approved by the House, but not voted
upon in the Senate.

---

CRS-16
EGTRRA regarding conservation easements, modifications to the generation-
skipping transfer tax, and the extension of time for payment of the estate tax. But the
sunset would no longer apply to the remaining estate tax provisions of EGTRRA.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 (P.L. 108-27)
reduced the maximum tax rate that applies to long-term capital gains and dividends
under the individual income tax (to 0% or 15%, depending on the amount of other
income) through December 31, 2008. The Tax Increase Prevention and
Reconciliation Act of 2005 (P.L. 109-222) extended the sunset date for two years,
until December 31, 2010. H.R. 3170 would permanently extend the lower rates with
respect to capital gains, but not extend them for dividend income.
H.R. 3475 (Capuano). Introduced September 5, 2007; referred to the Ways
and Means Committee. H.R. 3475 would modify the estate and gift taxes by
increasing the unified credit to an exclusion-equivalent of $5 million per decedent,
effective in 2010. The $5 million exclusion amount would be indexed for inflation
after 2010. The annual inflation-adjustment would be rounded to the nearest
$10,000. The bill would repeal the one-year termination of the estate tax that is
currently scheduled to take place in 2010 under the provisions of the Economic
Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, P.L. 107-16). The
sunset with respect to the estate tax provisions of EGTRRA would take effect one
year earlier than currently scheduled — on December 31, 2009, instead of 2010. The
sunset would not apply to the increases in the estate, gift, and GST exemptions that
were in effect from 2002 through 2009. H.R. 3475 would also repeal the modified
carryover basis for assets that was scheduled to replace step-up in basis in 2010 when
the estate tax was eliminated. H.R. 3475 would repeal three provisions of EGTRRA
relating to the gift tax: the scheduled reduction of the maximum gift tax rate to the
maximum individual income tax rate in 2010 when the estate tax is repealed; treating
transfers in trust as taxable gifts; and limiting the gift tax credit to the equivalent of
tax on $1 million.
H.R. 4235 (Lowey). Estate Tax Reduction Act of 2007. Introduced
November 15, 2007; referred to the Ways and Means Committee. H.R. 4235 would
raise the estate tax exclusion to $3 million upon enactment. After 2007, the $3
million amount would be indexed for inflation. The annual adjustment would be
rounded to the nearest $10,000. As in H.R. 4172, H.R. 4235 would repeal the
subtitles of EGTRRA that repeal the estate tax and generation-skipping transfer tax
in 2010 and that replace the step-up in basis with a carryover basis at death at that
time. The other changes that EGTRRA made to the estate and gift taxes would
remain in effect. Again like H.R. 4172, H.R. 4235 would remove the sunset
provision of EGTRRA from applying to those changes. In addition, H.R. 4235
would reduce each of the marginal estate tax rates by 20% (one-fifth, not 20
percentage points). The bill’s provisions would take effect upon enactment.
H.R. 4042 (McNerney). Family Farm, Small Business, and Home Tax Relief
Act. Introduced November 1, 2007; referred to the Ways and Means Committee.
The provisions of H.R. 4042 would take effect on January 1, 2008, and remain in
effect for two years, until the estate tax is repealed on January 1, 2010, as scheduled
under EGTRRA.

---

CRS-17
Under the provisions of EGTRRA, the applicable exclusion amount under the
estate tax is scheduled to be $2 million for decedents dying in 2007 or 2008, and rise
to $3.5 million in 2009. H.R. 4042 would accelerate the increase to $3.5 million by
one year, to take effect in 2008 instead of 2009. The $3.5 million figure would be
indexed for inflation in 2009. The inflation-adjusted amount would be rounded to
the nearest multiple of $1,000.
EGTRRA gradually reduced the maximum marginal estate tax rate by one
percentage point per year, from 50% in 2002 down to 45% in 2007, where it is
scheduled to remain for 2008 and 2009. The top two marginal tax brackets of 50%
(for taxable amounts over $2.5 million) and 49% (for taxable amounts over $2
million, up to $2.5 million) remain in the Internal Revenue Code as amended by
EGTRRA. H.R. 4042 would establish 45% as the maximum tax rate and remove the
references to higher rates, effective in 2008. (It would remove from the code the
49% and 50% rate brackets and the subsection that governed the phasedown of the
maximum rate from 50% to 45%.)
Effective in 2008, H.R. 4042 would reinstate the qualified family-owned
business deduction (section 2057) that was eliminated by EGTRRA and increase the
amount of the deduction from $675,000 to $8 million. The $8 million figure would
be indexed for inflation in 2009. The inflation-adjusted amount would be rounded
to the nearest multiple of $10,000.
Under EGTRRA, the generation-skipping transfer (GST) tax is scheduled to be
repealed, together with the estate tax, in 2010. H.R. 4042 would accelerate the repeal
of the GST tax to 2008.
H.R. 4042 would introduce a new section into the estate tax law. It would
permit a deduction of up to $2 million from the value of the gross estate for the
adjusted value of the decedent’s principal residence. The residence must be located
in the United States and be included in determining the value of the decedent’s gross
estate. The residence must have been owned by the decedent or a member of the
decedent’s family and used by the decedent or family member as their principal
residence for periods aggregating (at least) five years during the eight years prior to
the date of the decedent’s death. The $2 million figure would be adjusted for
inflation in 2009. The inflation-adjusted amount would be rounded to the nearest
multiple of $1,000.
H.R. 4172 (Moore). Introduced November 14, 2007; referred to the Ways and
Means Committee. H.R. 4172 would increase the estate tax exclusion to $3.5
million, effective in 2008. After 2008, the exclusion would be indexed for inflation,
with the annual adjustment rounded to the nearest $10,000. The bill would repeal the
subtitles of EGTRRA that repeal the estate tax and generation-skipping transfer tax
in 2010 and that replace the step-up in basis with a carryover basis at death at that
time. The other changes that EGTRRA made to the estate and gift taxes would
remain in effect. H.R. 4172 would remove the sunset provision of EGTRRA from
applying to those changes.
H.R. 4242 (Pomeroy). Certain and Immediate Estate Tax Relief Act of 2007.
Introduced November 15, 2007; referred to the Committee on Ways and Means.

---

CRS-18
H.R. 4242 would raise the estate tax exclusion to $3 million for 2007 and 2008, and
set it at $3.5 million for 2009 and beyond. The exclusion amount is not indexed for
inflation. Like H.R. 4172 and H.R. 4235, H.R. 4242 would repeal the subtitles of
EGTRRA that repeal the estate tax and generation-skipping transfer tax in 2010 and
that replace the step-up in basis with a carryover basis at death at that time. The
other changes that EGTRRA made to the estate and gift taxes would remain in effect.
H.R. 4242 would remove the sunset provision of EGTRRA from applying to those
changes.
Under EGTRRA, the maximum estate tax rate was reduced to 45% beginning
in 2007. H.R. 4242 would “freeze” the maximum estate tax rate at its 2005 level of
47% for taxable amounts over $2 million. The bill would restore the 5% surtax on
taxable amounts over $10 million, up to the level sufficient to phase out the savings
from the unified credit (exclusion amount) as well as the graduated tax rates. (This
would restore the policy that was in effect from 1988 through 1997, under provisions
of the Revenue Act of 1987 (P.L. 100-203).) The aforementioned changes in the
estate tax would take effect in 2007.
In addition, H.R. 4242 would change the valuation rules for certain transfers of
nonbusiness assets and family-controlled entities. No valuation discount would be
allowed for nonbusiness assets and the nonbusiness assets would not be taken into
account in determining the value of the business entity. With the exception of
working capital, passive assets would generally not be considered as being used in
the active conduct of a trade or business and, hence, would be considered
nonbusiness assets. No minority discount in the valuation of a business entity would
be permitted because the transferee does not have control of the entity if the
transferee and members of his or her family have control of the entity. These
changes in valuation rules would take effect upon enactment.
Senate Bills to Repeal the Estate Tax
S. 1025 (Chambliss). Fair Tax Act. Introduced March 29, 2007; referred to
the Finance Committee. Companion to H.R. 25 (Linder). S. 1025 would
permanently repeal the estate, gift, and generation-skipping transfer taxes by
repealing Subtitle B of the Internal Revenue Code. It would also repeal the federal
personal income, self-employment, corporate income, capital gains, and payroll
taxes. It would replace these taxes with a revenue-neutral 23% personal consumption
tax on all retail sales of new goods and services. These changes would take effect
January 1, 2009.
S. 1040 (Shelby). Tax Simplification Act of 2007. Introduced March 29,
2007; referred to the Finance Committee. S. 1040 would permanently repeal the
estate, gift, and generation-skipping transfer taxes by repealing Subtitle B of the
Internal Revenue Code, effective January 1, 2008.
The bill also would repeal the alternative minimum tax and all income tax
credits. S. 1040 would replace the current income taxes with a flat tax levied at a rate
of 19% in 2008 and 2009, and 17% in 2010 and thereafter. There would be new
definitions of taxable income for individuals and businesses. The income tax
changes would take effect January 1, 2008.

---

CRS-19
S. 1081 (Specter). Flat Tax Act of 2007. Introduced April 10, 2007; referred
to the Finance Committee. S. 1081 would permanently repeal the estate, gift, and
generation-skipping transfer taxes by repealing Subtitle B of the Internal Revenue
Code, effective January 1, 2008. The bill also would repeal Subtitle H (relating to
financing presidential election campaigns) and Subtitle J (relating to coal industry
retiree health benefits). S. 1081 would replace the current income taxes with a flat
tax of 20% on the taxable earned income of individuals and on business taxable
income. The bill specifies the deductions that would be permitted in calculating the
taxable base for each of these income taxes.
S. 2547 (Bond). The Fair and Simple Tax (FAST) Act of 2008. Introduced
January 23, 2008; referred to the Finance Committee. Companion to H.R. 5105
(Drier). S. 2547 would repeal the estate and gift taxes by repealing Subtitle B of the
Internal Revenue Code, effective in 2009.
S. 2547 would also establish an alternative income tax system, based on
“simplified taxable income” taxed at three marginal tax rates of 10%, 15%, and 30%.
Each taxable year a taxpayer could elect to pay according to either this alternative
income tax system or the regular income tax.
S. 2547 would also make changes to the regular income tax system and the
alternative minimum tax. Most of the income tax amendments would take effect in
2009. In addition, S. 2547 would make all of the provisions of the 2001 tax act (P.L.
107-16) and certain individual income tax provisions of the 2003 tax act (Title I of
P.L. 108-27) permanent by repealing the EGTRRA sunset date of December 31,
2010.
Senate Bills to Modify and Retain the Estate Tax
S. 1994 (Salazar). Introduced August 3, 2007; referred to the Finance
Committee. S. 1994 would exclude from the gross estate the adjusted value of
qualified farmland that continues in farmland use by a qualified heir, under specified
conditions. S. 1994 differs from H.R. 1929 (Salazar) in two ways: it has no short
title and has one substantive difference. S. 1994 renumbers condition (2) for an
estate to qualify for the provision as (2)(A): the decedent’s gross income from the
trade or business of farming must have exceeded 50% of the decedent’s gross income
for three or more of the decedent’s last five taxable years. S. 1994 then adds an
either/or alternative, (2)(B): 50% or more of the adjusted value of the gross estate
at the date of the decedent’s death must consist of the qualified farmland. The rest
of S. 1994 is identical to H.R. 1929, as summarized above.

---

CRS-20
Appendix. Legislative Activity in Prior Congresses,
from 2000 through 2006
Preceding EGTRRA
Even before the enactment of EGTRRA, there were efforts in Congress to
permanently repeal the estate tax. The 106th Congress approved H.R. 8, the Death
Tax Elimination Act of 2000, but it was pocket vetoed by President Clinton on
August 31, 2000. The House sustained the President’s veto.22 Early in the 107th
Congress, the House passed H.R. 8, the Death Tax Elimination Act of 2001. Many
provisions of that bill were included in EGTRRA enacted on June 7, 2001 (P.L. 107-
16).23
Remainder of the 107th Congress
H.R. 2143, the Permanent Death Tax Repeal Act of 2001, was introduced on
June 12, 2001, just days after the enactment of EGTRRA. But the estate tax did not
receive further congressional attention until the spring of 2002, in the second session
of the 107th Congress. On April 18, 2002, the House passed an amended version of
H.R. 586, the Tax Relief Guarantee Act of 2002, part of which would have removed
the sunset provision of EGTRRA and thereby made permanent the repeal of the
estate tax and all other provisions of the 2001 tax cut law. On June 6, 2002, the
House passed H.R. 2143 which would have removed the sunset provision solely from
the estate tax provisions of EGTRRA (Title V). The House defeated the Pomeroy
Democratic substitute amendment which would have retained the estate tax but
increased the exclusion to $3 million per decedent in 2003.
On June 12, 2002, the Senate considered three amendments offered to H.R. 8
regarding the estate tax. The Conrad Democratic substitute amendment would have
retained the estate tax but increased the applicable exclusion amount to $3 million
22 H.R. 8 was introduced in the 106th Congress on February 25, 1999, on a bipartisan basis
by Representatives Dunn and Tanner. The version of H.R. 8 approved by the House Ways
and Means Committee was an amendment in the nature of a substitute offered in the
committee by Chairman Archer. This was the version approved by the House and the
Senate. For further description of H.R. 8 in the 106th Congress, and the Democratic
substitute amendments offered in its place, see CRS Report (archived) RS20592, Estate Tax
Legislation: A Description of H.R. 8, The Death Tax Elimination Act of 2000, by Nonna A.
Noto, Nov. 27, 2000, available from the author upon request.
23 H.R. 8 was reintroduced in the 107th Congress on March 14, 2001, on a bipartisan basis
by representatives Dunn and Tanner. It was replaced by an amendment in the nature of a
substitute by the Ways and Means Committee on March 29 and passed by the House on
April 4. For further discussion of H.R. 8 in the 107th Congress, and the Democratic
substitute amendments offered in its place, see CRS Report (archived) RL30912, H.R. 8:
The Death Tax Elimination Act of 2001, by Nonna A. Noto, April 9, 2001, available from
the author upon request. For a brief description of H.R. 8 and three other bills introduced
in the first session of the 107th Congress to permanently repeal the estate tax, see CRS
Report RL30875, Step-Up vs. Carryover Basis for Capital Gains: Implications for Estate
Tax Repeal, by Nonna A. Noto, April 20, 2001.

---

CRS-21
in 2003 and $3.5 million in 2009, among other changes. The Dorgan amendment to
the Democratic substitute amendment would have provided a full tax deduction for
family-owned business interests and raised the applicable exclusion amount to $4
million in 2009 for all estates, among other changes. The Gramm-Kyl (Republican)
amendment was identical to H.R. 2143. None of these amendments received the 60
votes needed to waive the budget point of order as established by a unanimous
consent agreement. On September 19, 2002, the House approved a resolution,
H.Res. 524, which called upon the Senate to approve H.R. 2143 before the 107th
Congress adjourned. The Senate did not act on the bill.24
The 108th Congress
All together, 26 measures addressing the estate tax were introduced in the 108th
Congress: 19 in the House and seven in the Senate. The bills can be grouped into
three broad categories. First, eight House bills would have made the repeal of the
estate tax permanent after 2010. Two Senate joint resolutions would have expressed
the sense of Congress that the number of years during which the estate tax is repealed
should be extended, pending permanent repeal of the tax. Second, one House bill
and three Senate bills would have accelerated the repeal of the estate tax — to 2003
or 2005. Third, 10 House bills and two Senate bills would have retained but altered
the estate tax. Some would have lowered the tax rates. Some would have increased
the exclusion amount for all estates. Some would have forgiven the estate tax on
family-owned businesses and farms but imposed a carryover basis in calculating the
capital gain if the heir later sold the business. Some would have repealed the
modified carryover basis instituted by EGTRRA and returned to the step-up in basis
rule for assets transferred at death. One would have deposited revenues from the
estate tax into the Social Security trust funds.
The House approved H.R. 8, the Death Tax Repeal Permanency Act of 2003
(Dunn) on June 18, 2003, by a vote of 264-163. H.R. 8 would have made the repeal
of the estate and generation-skipping transfer taxes permanent from 2010 onward by
exempting the estate tax provisions (Title V) from the sunset provisions of
EGTRRA. Prior to its vote on H.R. 8, the House debated and defeated the Pomeroy
substitute amendment. That amendment would have retained the estate tax but
increased the exclusion amount to $3 million per decedent, effective January 1, 2004.
It included other changes to the estate tax laws to partially offset the cost of
increasing the exclusion amount. The Senate did not take up H.R. 8 or any of its own
bills addressing the estate tax.25
24 For additional information, see CRS Report RS21224, Estate Tax: Legislative Activity in
2002, by Nonna A. Noto, February 5, 2003.
25 For additional information, see CRS Report RL31776, Estate Tax Legislation in the 108th
Congress, by Nonna A. Noto, May 14, 2004.

---

CRS-22
The 109th Congress26
On April 13, 2005, the House passed H.R. 8, which would have permanently
repealed the estate tax starting in 2010. Over a year later, on June 8, 2006, the Senate
voted on cloture on a motion to proceed to consider H.R. 8. The vote of 57-41 was
three short of the 60 votes needed. On June 16, Senate Majority Leader Bill Frist
proposed that the House pass a permanent estate tax reform compromise that could
attract 60 votes in the Senate. The Chairman of the Ways and Means Committee,
William Thomas, introduced two bills, H.R. 5638 and later H.R. 5970. Each was
approved by the House but never taken up by the Senate.
Chairman Thomas introduced H.R. 5638 on June 19, 2006. That bill contained
an estate tax reform proposal and a timber capital gains provision. The bill would
have restored the unified estate and gift tax exclusion and raised the applicable
exclusion amount (from $3.5 million in 2009 under current law) to $5 million per
decedent in 2010. On June 21, the House Rules Committee adopted a manager’s
amendment that would have indexed the $5 million exclusion to inflation after 2010,
rounded to the nearest $100,000. The bill would have lowered the tax rate on taxable
assets up to $25 million to the tax rate on long-term capital gains (currently 15% but
scheduled to revert to 20% in 2011). For taxable assets over $25 million, the tax rate
would have been twice the prevailing capital gains rate. Married couples would have
been able to carry over to the estate of the surviving spouse any exclusion unused by
the first spouse to die. The deduction for state death taxes would have been repealed.
The bill also would have repealed the provisions of EGTRRA that introduce a
modified carryover basis regime starting in 2010; thus, the step-up in basis rules
would have continued to govern assets transferred at death. The estate and gift tax
provisions of H.R. 5638 would have taken effect January 1, 2010, and been
permanent. In addition, H.R. 5638 would have created a new, temporary 60%
income tax deduction for qualified timber capital gains effective from the date of
enactment through calendar year 2008.27 The House passed H.R. 5638 by a vote of
269-165 on June 22, 2006.
The Joint Committee on Taxation (JCT) estimated that the estate tax provisions
of H.R. 5638 would have cost $282 billion over the period FY2006-FY2016,28 or
73% as much as total repeal. (Indexing the exclusion amount added $3.25 billion to
26 For additional information, see CRS Report RL32818, Estate Tax Legislation in the 109th
Congress, by Nonna A. Noto, March 29, 2007.
27 For further explanation of the bill, see U.S. Congress, Joint Committee on Taxation,
Technical Explanation of H.R. 5638, The “Permanent Estate Tax Relief Act of 2006” as
introduced in the House on June 19, 2006, 109th Cong., 2nd sess., JCX-20-06, June 20, 2006.
Available at [http://www.house.gov/jct/].
28 U.S. Congress, Joint Committee on Taxation, Estimated Revenue Effects of H.R. 5638, as
Amended, Scheduled for Consideration by the House of Representatives on June 22, 2006,
109th Cong., 2nd sess., JCX-23-06, June 22, 2006. Available at [http://www.house.gov/jct/].

---

CRS-23
the original cost estimate.29) The timber provisions were estimated to cost an
additional $940 million.
Next, Chairman Thomas introduced H.R. 5970 on July 28, 2006. H.R. 5970
was called the “trifecta” bill. In addition to reforming and extending the estate tax,
the bill would have extended and expanded a number of popular tax relief provisions
that had expired at the end of 2005 (the “tax extenders”) and would have increased
the minimum wage. The bill also included a title of amendments to the Surface
Mining Control and Reclamation Act (SMCRA).
H.R. 5970 would have reunified the estate and gift taxes. The estate tax
exclusion would have increased (from $3.5 million in 2009 under current law) to
$3.75 million in 2010 and by an additional $250,000 each succeeding year until it
reached $5 million in 2015. After 2015, the $5 million exclusion would have been
indexed for inflation. Married couples could have transferred any of the exclusion
amount unused by the first spouse to die to the estate of the surviving spouse. As in
H.R. 5638, the tax rate on taxable assets up to $25 million would have been equal to
the tax rate on long-term capital gains (currently 15% but scheduled to revert to 20%
in 2011). In contrast to H.R. 5638, the tax rate on taxable estate values over $25
million would have been set in the law: at 40% in 2010, 38% in 2011, 36% in 2012,
34% in 2013, 32% in 2014, and 30% in 2015 and beyond. The $25 million bracket
divider would have been indexed for inflation, for the first time in the history of the
estate tax. The deduction for state estate taxes would have been repealed. The estate
and gift tax provisions of H.R. 5970 would have taken effect January 1, 2010, and
been permanent. The House approved H.R. 5970 by a vote of 230-180 on July 29,
2006. The JCT estimated that the estate tax provisions of H.R. 5970 would have cost
$268 billion over FY2007-FY2016,30 or about 69% as much as total repeal.
While Congress did pass substantive tax legislation in the final days of the 109th
Congress, the act did not include any estate tax provisions.31
29 U.S. Congress, Joint Committee on Taxation, Estimated Revenue Effects of H.R. 5638, the
“Permanent Estate Tax Relief Act of 2006”, 109th Cong., 2nd sess., JCX-21-06, June 20,
2006. Available at [http://www.house.gov/jct/].
30 U.S. Congress, Joint Committee on Taxation, Estimated Budget Effects of H.R. 5970, the
“Estate Tax and Extension of Tax Relief Act of 2006 (‘ETETRA’),” as introduced in the
House of Representatives on July 28, 2006, 109th Cong., 2nd sess., JCX-34-06, July 28, 2006,
line I. Available at [http://www.house.gov/jct/].
31 The Tax Relief and Health Care Act of 2006, P.L. 109-432, enacted on December 20,
2006.

---