Estate Tax Repeal: Through the Looking Glass

The Economic Growth and Tax Relief Reconciliation Act of 2001 promises dramatic reductions in income and estate taxes over a nine-year phase-in period, culminating in 2010 with complete repeal of the estate tax and introduction of a new carryover basis regime for inherited property. The Act's sunset provision automatically terminates these substantive changes at the end of 2010 and reinstates prior law for 2011 and subsequent years. In effect, the sunset provision transforms the large-scale tax cuts into a temporary measure and leaves open the question of whether to make those cuts permanent. Since the Act was signed into law, political and economic developments have already begun to reshape the debate over the future of the estate tax. The article examines the revenue and distributional impact of estate tax repeal and offers a critical assessment of the new carryover basis regime as a replacement for the estate tax. Although in the abstract carryover basis represents a plausible alternative to the unlimited deathtime basis step-up for appreciated property under current law, the carryover basis regime set forth in the Act is marred by outsized exemptions, substandard drafting and inadequate enforcement mechanisms. As the mounting revenue costs and skewed distributional effects of the Act become clearer, the prospects for making the tax cuts permanent are likely to fade. As the federal budget comes under increasing pressure to meet the costs of preserving social security and medicare while prosecuting a global war on terrorism, the estate tax may reassert its traditional role as a small but important - perhaps indispensable - component of the overall tax system.