Members of both Parties joined the debate this week on income taxes. Without action by Congress, all of the tax reductions in the 2001/2003 tax acts will be phased out on January 1, 2011.

The White House has steadfastly maintained that the reductions for lower and middle-income brackets should be retained, while the reductions for the top brackets must be phased out. Under the White House proposal, individuals with incomes over $200,000 ($250,000 for married couples) would pay higher taxes. The top two brackets will increase to 36% and 39.6%. In addition, the White House proposes that the capital gains tax rate returns to 20%.

Senator Ben Nelson (D-NE) has expressed concern about the increase in taxes on upper income individuals. He is joined by Sen. Charles Grassley (R-IA), who has consistently supported extending all of the 2001/2003 tax brackets. Sen. Grassley suggested that it would be important to continue the tax reductions in order to encourage small business owners to hire new employees and reduce unemployment.

A long-term deficit hawk on the Democratic side is Senate Budget Committee Chair Kent Conrad (D-ND). He stated for the first time this week that he may be open to a temporary extension of the top brackets at the current 33% and 35% rate. Senator Conrad indicated that at some future time it will be necessary to "pivot" and move aggressively toward deficit reduction. However, he questioned whether the economy is strong enough to start the process of tax increases this year.

House Speaker Nancy Pelosi (D-CA) joined the debate with a strong affirmation of the White House position. She stated, "Our position has been that we support middle-income tax cuts. The tax cuts at the high end have increased the deficit enormously and they have not created jobs in the eight years."

Editor's Note: With Congress soon turning to the fall election, it is highly probable that action on income taxes will be deferred until after the election. With bipartisan concern about unemployment and the economy, it is quite likely that the tax reductions at the lower and middle brackets will be extended. The result for upper-income individuals is still uncertain.


Senate Refuses to Repeal Estate Tax

On July 21, 2010, Sen. Jim DeMint (R-SC) offered an amendment to the unemployment bill that would repeal the estate tax. Sen. DeMint noted that the White House is creating a difficult environment for "small businesses that are already facing higher income taxes and higher investment taxes."

The proposed amendment was defeated on a vote of 39-59. Democratic Senators Blanche Lincoln (D-AR) and Ben Nelson (D-NE) supported the abolition of the estate tax. Republican Senators Olympia Snowe (R-ME), Susan Collins (R-ME) and George Voinovich (R-OH) opposed the abolition of estate tax.

Sen. Lincoln and Sen. Jon Kyl (R-AZ) continue to advocate an estate tax compromise. Under the compromise, the $3.5 million exemption from 2009 would be increased over 10 years to $5 million and the top 45% estate tax rate would be reduced to 35% over that same time frame.

Editor's Note: The political pressure on the Senate continues to rise. Following the March death of Houston oilman Dan Duncan with a $9 billion estate, the news media noted that the government had lost $2 to $3 billion on that estate alone. When New York Yankees owner George Steinbrenner passed away with an estimated $1.1 billion estate, news media suggested that he hit a "home run" by dying in 2010 with no estate tax. While action is not likely before the election, there now seem to be two general patterns to a potential Senate compromise. First, the estate tax exemption will start at $3.5 million and increase to a higher number over ten years. Second, the estate tax rate will begin at 45% and decrease again over that same decade. The House majority has held strongly to a $3.5 million exemption and 45% top tax rate, so the final compromise would also need to reflect their preferences.