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Today in Washington – December 14, 2010

Taxes and spending are on the House and Senate agenda for today.  After the Senate passes the President’s tax deal, the House may blow up the compromise by changing the Death Tax.  Later this week, Senate appropriators are reportedly trying to sneak through a massive new Omnibus spending bill.  They are planning on offering an Omnibus Spending bill as a complete substitute for the Continuing Resolution, a bill to fund the federal government at 2010 levels with some changes.  The Omnibus Spending bill was secretly negotiated between House Democrat Appropriators and some Senate Republican Appropriators as a last ditch effort to pass some earmarks and increase spending for fiscal year 2011.  Conservatives are also concerned that Senate Majority Leader Harry Reid (D-NV) may try to bring up the New START Treaty early next week.

Today, the Senate resumes debate of the tax compromise bill as an amendment to H.R.4853.  Senators Kid Bond (R-MO) and Judd Gregg (R-NH) will give farewell speeches later today.  The Senate is expected to complete work on the tax measure today or tomorrow, then they must take up an end of year spending bill before the current measure runs out at the end of the week.  The House has 16 Suspension votes scheduled for today and will take up the Senate passed tax bill later this week.

USA Today reports that the compromise tax package is expected to pass the Senate and a battle is expected in the House later this week.

A proposal to extend Bush-era income tax cuts set to expire at the end of the year easily cleared a critical Senate vote Monday, shifting the focus to skeptical House Democrats and setting up a showdown on the measure later this week. President Obama, acknowledging discontent within his party over the compromise he reached with Republicans this month, nevertheless pressed the House to act quickly. The White House has cast the measure as key to boosting the nation’s economy.  “I recognize that folks on both sides of the political spectrum are unhappy with certain parts of the package,” Obama said. “But that’s the nature of compromise, sacrificing something that each of us cares about to move forward on what matters to all of us.

This bill may be scuttled by House Democrats who want to the Death Tax, also known as the estate tax, to increase next year.  The Death Tax has changed dramatically over the past few years.  The Wall Street Journal reports that the Death Tax in 2001 was at 55% with an exemption for estates for individuals valued under $675,000.  In 2009, the Death Tax was at 45% with an exemption of $3.5 million, then it dropped to 0% this year.  If Congress fails to pass any modification of the Death Tax, it is scheduled to jump to 55% with a $1 million exemption on January 1st.

The Wall Street Journal further reports that these changes in estate tax rates have been a nightmare for estate planners.

Thus would end one of the sorriest episodes in U.S. tax history: the Great Estate-Tax Lapse of 2009. It began late last year when a Senate fumble forced a break in the tax for 2010. Rates fell from 45% to zero—causing some taxpayers to cling to life (or their family members to delay pulling plugs) until the new year to save money for their heirs.  The tax has been in limbo ever since, with taxpayers and advisers in the dark as to whether the law would change retroactively for this year or prospectively for next—when the tax was scheduled to snap back at a 55% top rate and a $1 million per-individual exemption, down from 2009′s $3.5 million.  The confusion prompted 81-year-old Iowa farm-products entrepreneur Eugene Sukup to tell The Wall Street Journal last summer, “You don’t know whether to commit suicide or just go on living and working.”

Stephen Moore of the Wall Street Journal reports that Speaker of the House Nancy Pelosi (D-CA) has been vetting a change to the Death Tax.

One reason for the House Democratic revolt against the tax deal is the 35% death tax provision. House Speaker Nancy Pelosi has said that the liberal caucus, which is interchangeable with the Democratic caucus, wants a 45% or 55% rate

If the House changes the bill, the Senate will have to vote again on the President’s tax deal — a deal that seems to keep changing from moment to moment.  This change would scuttle the compromise and the Senate would have a hard time passing this bill a second time.

Ed Feulner, President of The Heritage Foundation (my employer) writes for the Washington Times today that this deal was never a great deal for conservatives.

Unfortunately, the tax-cut deal has deteriorated since it was announced, as congressional liberals have loaded it with special-interest provisions and vowed still to raise taxes on the hated “rich.” It has morphed from an agreement that conservatives could begrudgingly accept to an unholy mess that no one who cares about America’s financial health can support.  Even a clean deal that offered temporary tax relief would be no great shake. Better than nothing? Sure. But extending it for just two years would mean that 1) we’d likely be back here in just 24 months, engaging in the usual political horse trading while the productive sector of our economy held its breath, and 2) the atmosphere of uncertainly would continue to cloud our economy.

Senator Jim DeMint (R-SC) and other Senate conservatives voted no on this deal.  Some conservatives in the House are pledging to also vote no on this deal, because they expect that conservatives in the House and Senate can force through a better deal in 2011.  If Speaker Pelosi poisons the deal in the House by setting up a procedure to change the Death Tax, the President’s tax compromise may suffer an early death when Senate Republicans walk away from the compromise.

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