Tax was allowed to expire

It's been nearly four months since our last update on President Barack Obama's campaign promise to freeze the 2009 estate tax law, which exempts the first $3.5 million of an estate and has a top rate of 45 percent. At the time, we wrote that it is widely expected that Congress will freeze the tax, and thereby confirm Benjamin Franklin's famous adage that only two things in life are certain: death and taxes. Gridlocked over health care and financial regulation reform, however, Congress has let the estate tax expire, potentially making 2010 a very promising year for those with wealthy older relatives.

As we wrote in our first update, it all started in 2001, when Congress approved measures to gradually increase the tax exemption while slashing the top rate. At the time, estates valued at $675,000 or higher were subject to a tax of up to 55 percent. In 2009, the threshold was $3.5 million per individual (or $7 million per couple), with a 45 percent tax rate. In 2011, all estates worth more than $1 million will be taxed at 55 percent. In 2010, unless Congress takes measures to extend the 2009 law, the tax would temporarily disappear for a year.

On Dec. 3, 2009, the House of Representatives passed a law to permanently extend the 2009 rates. Sponsored by Rep. Earl Pomeroy, D-N.D., the legislation passed 225-200, mostly along party lines, with opposition coming mostly from Republicans, who widely support a repeal of what is often referred to as the "death tax." Overwhelmed by contentious debate on health care reform, however, the Senate did not place the bill on the legislative calendar until Dec. 24, 2009, and subsequently failed to take a vote. With no congressional action in the days between Christmas and the Jan. 1, 2010, deadline, the estate tax was allowed to expire.

The $3.5 million dollar question is whether Congress will move to retroactively enact the tax in 2010. Senate Finance Committee Max Baucus said he'll work to do just that, but there is debate in legal circles as to whether the retroactive law would survive what would surely become a constitutional challenge. According to Paul Caron, associate dean at the University of Cincinnati law school, the Supreme Court wrote in 1994 that a retroactive tax law is constitutional, as long as it has a rational purpose, is not arbitrary, and is enacted without excessive delay. Bob Williams from the Tax Policy Center wrote on his blog that he has "no idea whether such (retroactive) legislation could survive expected cries of 'Foul!' and the accompanying lawsuits," but nevertheless urged his readers to avoid making any hasty life-and-death decisions.

Because Congress could technically always go back and retroactively reinstate the tax, President Obama still has some time to uphold his promise. Until we see some form of movement toward a compromise or a retroactive reinstatement, however, we are knocking this one down to Stalled.