Hurricane Katrina Likely to Impact Estate Tax Repeal

CARLSBAD, CA - The devastation that Hurricane Katrina brought looks like it may have a far-reaching impact on the permanent repeal of the estate tax.

Estimates for the storm and its aftermath are now topping out over $100 billion, with almost the entire tab being paid out of the Federal Reserve. To date, President Bush has already authorized federal aid of $62 billion, and the White House and members of Congress have signaled it is likely to climb.

The question now becomes where the funds for clean-up and rebuilding of the Gulf area will come from. One likely source of revenue could be the estate tax.

The Disappearing Tax?

When the Economic Growth and Tax Relief Reconciliation Act of 2001 was first signed into law, the estate tax was one of the main targets.

Back in 2001, every taxpayer was able to shelter the first $1 million of their estate from estate taxes. Amounts over $1 million, at the time, were taxed at rates that reached as high as 50%. But when the EGTRRA was signed into law, the estate tax credit was increased. In fact, the entire estate tax was going to be gradually phased out, until its complete elimination in 2010.

However, in 2011, the sunset provision of the law brings the estate tax back to 2002 levels. For individuals that pass away starting in 2011, only the first $1 million of the estate is sheltered from what some lawmakers have called the "success tax." The remaining estate value above the $1 million mark can be taxed at rates that reach as high as 50%.

Attempts to Permanently Erase the Tax Fall Flat

The sunset provision of the law has many lawmakers and their constituents concerned. In 2003, the House passed legislation to abolish the estate tax beyond 2010, driven primarily by GOP lawmakers. President Bush was also a very vocal opponent of the estate tax, noting that the very legislation he signed into law does not provide families with "certainty so they can plan for the future."

However, when the legislation reached the doors of the Senate, the vote on repeal was 54-44, short of the 60 needed.

Several Senators noted that the estate tax is a major source of income for the U.S. Government. According to Congress' Joint Committee on Taxation, current legislation phasing out the estate tax in 2010 will cost Uncle Sam close to $24 billion. Eliminating the estate tax in 2011 and 2012 would have pushed that cost well over the $50 billion level.

Even though senators killed the legislation back in 2003, the issue has never really gone away. Many lawmakers have cited the estate tax's impact on small business and family-owned farms as a debilitating penalty. Opponents of the "death tax" have claimed that it unjustly taxes wealth twice (once when it was earned, and again at death). In fact, the Bush administration and opponents seemed to be gaining momentum on abolishing the tax permanently early in 2005. And in summer of 2005, the House again passed legislation to abolish the tax, once and for all. The Senate was expected to take up the measure when Congress returned from its summer recess.

Then the Storm Came...

When senators returned from their summer break, they were confronted with emergency aid for the states of Louisiana, Mississippi, and Alabama. An emergency aid package of $10 billion was immediately passed and signed into law, with another $52 billion aid package signed on September 9, 2005.

Now that the floodwaters are receding, Hurricane Katrina's costs will likely exceed $100 billion. Combined with the expense of the ongoing war in Iraq and Afghanistan, Katrina has put unprecedented pressure on the Treasury. Lawmakers are already concerned with the current deficit, expected to reach $1.3 trillion over the next decade. And with the federal government now helping millions in the storm-ravaged area, the budget deficit will take an even greater hit.

With this increased pressure on federal coffers, it may be difficult for estate tax repeal to take place in this calendar year. Not only will lawmakers have to contend with growing discontent over the size of the deficit, but they may not even have much time to consider such legislation for at least the next couple of months. Plus, other legislation, including Social Security reform and stem cell research, may take priority over the estate tax repeal.

Election Year Politics Not a Factor

The estate tax became a hot topic during the last election year, with candidates stumping for the fact that the tax should be repealed permanently.

Opinions on this issue seem to be drawn straight down party lines. GOP leaders were promising to do everything possible to bring the issue up again, while Democratic leaders were promising to kill legislation again if brought to the floor for a vote.

However, 2005 is not a very big election year, with few politicians campaigning. So for the time being, the estate tax issue may quiet down as other legislation takes priority, and the federal government contends with a mushrooming deficit.

Learn More About Saving Your Assets

Regardless of whether the estate tax is repealed, there are strategies that successful individuals can take now to mitigate the impact of estate taxes. Many of these strategies are flexible, and will automatically take advantage of new legislation if ever passed.

And to learn more about ways you can protect your family from the estate tax, contact a SaveWealth Advisor today!