The National Review Needs a Tax Lawyer

Postings have been light lately due to the press of work, but I could not let this one go by. It proves that it is possible to be both a knave AND a fool.

In a pro-estate tax repeal editorial screed, the NRO accused the Joint Committee of Taxation of ignoring the revenue effects that the proposed estate tax repeal bill would have by repealing the step-up basis rules. Thus, according to the NRO:

The JCT reported that repealing the death tax would cost the federal government $281 billion in revenue over the first five years. But that number doesn’t include the effects of a provision in the bill to eliminate the exemption that heirs currently receive from paying capital-gains taxes on the assets they inherit.

There's only one problem with the NRO's argument--that's not what the repeal bill would do.

The JCT explanation of the repeal bill can be found here. On pages 6-7 of the explanation, the JCT tells how under current law, there will be a very limited modification of the step-up basis rules in 2010. This modification, which will only be effective for one year, would effectively limit the step-up in basis for decedents dying in 2010 to $1.3 million. In other words, for one year the step-up basis rules are modified in a way that will increase income tax revenues. However, after that one year, the current statue's provisions sunset and the step-up in basis rules, unmodified, are reinstituted.

Even this limited one-year modification of the step-up basis rule would be repealed under the proposed estate tax repeal bill. As the JCT explains on page 16:

The provision also repeals the modified carryover basis rules that, under EGTRRA [which is to say, current law], would apply for purposes of determining basis in property acquired from a decedent who dies in 2010. Under the provision, a recipient of property acquired from a decedent who dies after December 31, 2009, generally will receive date-of-death fair market value basis under the basis rules in effect under present law with respect to decedents dying prior to 2010.

In other words, the NRO is simply wrong both as to what the law is and also what it would be if the estate tax repeal bill is enacted. Contrary to the NRO's analysis, there would be no positive revenue effect due to the repeal of the basis step-up rules. In fact, in 2010, the only year in which the basis step-up rules are currently scheduled to be modified, the repeal bill repeals the modification, essentially reducing, rather than increasing, any additional income tax revenue that would offset the losses from the repeal of the estate tax. Since, under current law, there will be no estate tax in 2010, the repeal bill triggers a net revenue loss in 2010.

Before the NRO accuses the JCT of bad faith, it should at least read and attempt to understand the provisions of the bill.

Hat Tip: TaxProf.


Slight Correction: The above analysis was not of the full estate tax repeal proposal, but was of the "Permanent Estate Tax Relief Act of 2006" (a.k.a., "Estate Tax Repeal Lite"). This bill would not completely repeal the estate tax, but would simply gut it. It is the current bill that Frist is trying to push through the Senate.

The criticism of the NRO stands, however, since it was the JCT's revenue loss estimates for this bill that the NRO wrongly attacked.