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The Congressional Budget Office has evaluated the cost of four possible revisions to the federal estate tax in its current form under the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”).  EGTRRA would currently abolish the estate tax in 2010, and then bring it back in 2011 with a $1.0 million exemption and a marginal tax rate on decedent estates of 55%. 

1. Alternative one would increase the exemption for the combined tax from the current $3.5 million to  $5 million starting in 2010, and set the tax rate to equal the highest capital gains cains (currently 15% in 2010 and 20% after that).  Five-year “cost” from 2010-14:  $128.3 billion. 
2. Alternative two would provide for two tax rates, the first $25 million of the taxable estate would be taxed at the highest capital gains rate, and the amount above $25 million would be taxed at 30 %.  Five-year cost:  $116.6 billion.
3. Alternative three would maintain the current $3.5 million exemption and 45% tax rate in 2010.  Five-year cost:  $65.1 billion.
4. Alternative four would repeal the estate tax permanently in 2010, and maintain the current gift tax exemption at $1.0 million.  This alternative would eliminate the 2011 estate tax reinstatement, but retain the modified carryover basis in EGTRRA.  Five-year cost:  $163.3 billion. 

The least “expensive” of these alternatives, number 3, is also by far the likeliest. 

See  Budget Options:  Health Care, for a jolly discussion of a multitude of potential revenue enhancers.  The discussion of Estate Tax alternatives starts at page 239.

Congress is considering a one-year extension of the current estate tax provisions in order to prevent the current law’s doomsday scenario of complete repeal for calendar-year 2010.  Under current law, $3.5 million is exempt from every individual’s estate, and the excess is taxed at 45%.  When Barack Obama was running for president last year, his platform proposed to make the 2009 law permanent.  A one-year extension could create an interesting (and sneaky) policital option — leaving the rest of the current law in place, and allowing the estate tax to revert to a $1.0 million exemption and a 55% tax rate starting in 2011.  This is what would happen if Congress passed a one-year patch for 2010 and then did exactly nothing further.  Wall Street Journal [$].