Estate Tax Gone for 2010, but Retailers Left in Limbo

The good news for food retailers is that the estate tax has officially been repealed. The bad news is that nobody knows how long it will last or what form it might take when it does return. As 2009 came to a close last week, the estate tax a 45% levy on inherited wealth that impacts family-owned businesses was officially repealed, thanks to legislation enacted in 2001. However, it is slated

WASHINGTON — The good news for food retailers is that the estate tax has officially been repealed. The bad news is that nobody knows how long it will last — or what form it might take when it does return.

As 2009 came to a close last week, the estate tax — a 45% levy on inherited wealth that impacts family-owned businesses — was officially repealed, thanks to legislation enacted in 2001. However, it is slated to return at a 55% rate in 2011.

“None of us can believe they just let this expire with nothing to replace it,” Jennifer Hatcher, group vice president of government relations at Food Marketing Institute, Arlington, Va., told SN last week. “The biggest challenge is just that businesses are not able to plan. There is no certainty.”

Both FMI and National Grocers Association, also based in Arlington, had supported a measure that would have reduced the rate to 35% on an ongoing basis, but congressional legislators could not come to an agreement on the changes before the end of the 2009 session amid the all-out push for health care reform.

Instead, some in Congress have indicated they will take the measure up early this year, with the hope of reaching a compromise that could reinstate the tax at a lower rate.

In addition to seeking a lower rate than the 55% that would take effect in 2011, retailers would also like to see the exemption level raised. Last year inheritances worth less than $3.5 million are exempt, but the exemption level would return to $1 million in 2011 if no legislation is enacted. The previous proposal favored by retailers raised the exemption level to $5 million. In addition, retailers would like to see that level indexed for inflation to allow it to rise over time.

Hatcher said congressional leaders have indicated they plan to take up the legislation early in the first session of 2010. The House returns on Jan. 12 and the Senate Jan. 20, and meetings are slated at the end of the month to plan legislation for the year.

“We are going to be pushing full speed ahead on it, and hopefully this will give us another opportunity to put something into place,” Hatcher said. “At this point, I think it is hard to figure out what they will do. The question is, what is the rate going to be, and what is this legislation going to look like?”

Tom Wenning, executive vice president, NGA, said some legislators have suggested that the estate tax could be reenacted sometime in 2010 retroactively to the beginning of the year, so that estates could be taxed later even though they were inherited at a time when the tax had been repealed.

“Of course, that raised questions in the legal community about whether or not that could be done,” he said.

He agreed that signals from congressional committee leaders indicate that they do plan to tackle the issue early in 2010.

“The question is what would they do,” he said. “There are those who would want to reduce the exemption from its current state of $3.5 million, to those like NGA that want to raise it.”

In the House, one previous proposal from Rep. Shelley Berkley, D-Nev., called for raising the exemption by $150,000 per year in each of the next 10 years to get to $5 million, while reducing the rate by 1% per year to reach the 35% target.

The compromise proposal last year, suggested by Sen. Blanche Lincoln, D-Ark., and Sen. Jon Kyl, R-Ariz., would have cut the tax rate to 35% and raised the exemption level to $5 million right away.

Wenning said the Obama administration and some leaders in Congress appear to advocate freezing the rate at 45% and the level of exemption at $3.5 million.

“I think overall within the legal community and business community, it has created a great deal of confusion as far as giving business owners and others an opportunity to plan into the future,” Wenning said. “I think what most people are hoping Congress will do is generate some relief for family-owned businesses.

“From NGA members' perspective, it is certainly important for them to have an increase in the exemption level and a reduction in rates so that the business can go on and without having to refinance, particularly when refinancing is so hard to come by these days. We continue to advise our members to reach out to members of Congress to support Sen. Kyl and Sen. Lincoln's amendment.”

One complication that could thwart any effort to reinstate the estate tax in 2010 is that it is an election year, and legislators could be reluctant to support what would be viewed as a “new” tax, since the previous tax was allowed to expire.