WASHINGTON -(Dow Jones)- A proposal to allow wealthy people to prepay estate taxes while they are still alive, in exchange for a lower tax rate, has caught the attention of Senate staff trying to craft a bipartisan, permanent compromise on the estate tax.
The estate tax prepayment idea is being pushed by Sen. Maria Cantwell (D., Wash.) as a possible compromise between senators who want a permanent, 35% estate tax rate and the position of President Barack Obama, who supports a 45% rate on inherited wealth.
Cantwell's staff is trying to build support for the plan among a small group of senators seeking to negotiate a deal, including Sens. Jon Kyl (R., Ariz.), Blanche Lincoln (D., Ark.), Charles Grassley (R., Iowa) and Max Baucus (D., Mont.).
The plan would allow wealthy people to place assets in a prepayment trust while they are still alive. Those assets would be subject to a 35% tax, which the estate owner would have five years to pay, according to a document describing the plan, obtained by Dow Jones Newswires.
The document is a request from Cantwell's office to the congressional Joint Committee on Taxation to estimate the effects of the proposal on federal revenue. The JCT has not yet provided an estimate, according to Senate aides.
But the measure could be expected to have a net positive effect on revenue over the next 10 years to the extent that wealthy families begin to prepay taxes to take advantage of the lower rate.
The federal estate tax was repealed for a one-year period beginning Jan. 1. It is slated to return in 2011 at a 55% rate on inherited wealth over $1 million, unless Congress acts.
The abrupt repeal has motivated Democrats like Baucus to try to reinstate the tax to create continuity and limit the impact of the repeal on federal revenue. Meanwhile, Kyl and Lincoln are keen to prevent the reimposition of the 55% rate, and are seeking a compromise.
Obama has proposed making permanent the rates that were in effect in 2009, that is a 45% rate on all wealth above $3.5 million, or $7 million for married couples. Kyl and Lincoln want a 35% rate, with the first $5 million, or $10 million for married couples, exempt from tax.
Kyl and Lincoln, while they succeeded last year in securing support from a majority of the Senate for their plan, have not yet been able to secure the 60 votes that would be needed to waive budget rules, because the plan adds to the deficit.
One argument for Cantwell's prepayment plan is that it could deliver the 35% rate, without adding to the federal deficit in the short term. But it could mean forfeiting revenue over the long run that the government would otherwise collect if a 45% rate was in effect.
Estate owners that prepay their taxes would not be eligible for the $3.5 million "unified credit" exemption, according to the Senate document. They would continue to pay income taxes on assets held within the trust.
Key negotiators have yet to sign on to the proposal, and it remains in its formative stages. A House Democratic aide questioned whether the proposal will be able to overcome challenges of design and administrability.
A Senate tax cut bill aimed at spurring job creation, slated to hit the Senate floor as early as next week, could draw an amendment on the estate tax. Grassley and Kyl are discussing whether to attempt to offer such an amendment, or to seek agreement with Senate Majority Leader Harry Reid (D., Nev.) for a vote on a stand-alone measure by a specified time.
Kyl said Thursday that Republicans have not yet obtained such a commitment. "But that doesn't mean we won't," Kyl told reporters. "We're just in the process of figuring out exactly how we'll deal with that."
(Patrick Yoest contributed to this article.)
Copyright 2009 Dow Jones Newswires
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