Paul Dr. Freedenberg

Everything comes to a head in 2010, so I can't understand why so many people want to run for president. It will be nothing but headaches." That was the analysis of Senator Max Baucus (D-Mont.), the new chairman of the Senate Finance Committee, in a luncheon address to a recent meeting of a Washington think tank.

Senator Baucus makes an important point. There are demographic and legislative land mines that are likely to greet the new president when he or she takes office. In addition to growth in entitlements driven by an aging population, there is the ever-growing problem of the Alternative Minimum Tax (ATM) which automatically raises taxes for a larger and larger percentage of the middle class every year. There is another tax that becomes a major headache in 2011, also during the term of the next president: The inheritance tax. This tax is of more than passing interest to readers of this column, particularly those with family-owned companies (or those who would like to pass on a little of their wealth to the next generation).

First, a bit of history: In 2001, as part of the Bush tax reforms, the "death tax" was targeted for elimination by 2010. To protect that Republican tax reform bill from filibuster, it was made a part of the larger Budget Reconciliation Act and, under Budget Reconciliation Act rules, the provisions of the Act expire in ten years and pre-2001 inheritance tax tables go back into effect.

Despite this, there is no indication that this "death tax" is on the agenda for this Congress. Currently, the inheritance tax rate is 45 percent and the exemption amount is $2 million, and will decline into complete elimination in 2010. Unless a new law is passed in the interim, the tax rate will roar back to 55 percent in 2011, and the exemption amount will go back down to its pre-2001 level of $1 million. Insiders call this the "throw Mama from the train" provision, since it provides an incentive for dying in 2010 or, in the more benign analysis, penalizes heirs after that year.

There is hope, however, that the death tax will be forced onto the agenda during the 110th Congress. The "bad AMT" claims more and more taxpayers every year, in part because state and local taxes are deductible. That hurts taxpayers in states where those taxes are highest, notably the so-called "Blue States," such as New York, home of the new Chairman of the House Ways and Means Committee, Charlie Rangel (D-NY). He announced that solving the alternative minimum tax problem is one his highest priorities.

Death tax reform is being pushed by senators from "Red States," such as Senator Jon Kyl (R-Ariz.) With its confiscatory tax on land, the death tax also affects rural states, such as Montana which Senator Baucus represents. One could easily see the makings of a deal in this clash of tax priorities. The high-tax eastern states could be relieved of their looming alternative minimum tax burden in return for a reasonable compromise on the exemption amount and the rate of any new inheritance tax legislation.

The numbers being discussed on the Republican side are roughly a 35 percent rate for amounts over an exemption of $5 million, with the Democrats countering with a 45 percent rate and a $3.5 million exemption per person. Of course, the Republicans would like to see a lower rate, but they are not likely to win that in a Democrat-controlled Congress.

The most likely result is for the problem to be added to the list of headaches for the next president. But rational and reasonable compromise should not be too much to ask of our elected representatives.

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