Public outrage and political theater over billionaires dying tax-free this year have prompted lawmakers to put a lid on this issue quickly while Democrats are still in charge.

Billionaire George Steinbrenner, owner of the New York Yankees, died this week at the age of 80. He was a man with the Midas touch and possessed a perfect instinct for impeccable timing.

Timing again was on his side for dying in a year with no federal estate taxes on the books. News reports from NBC, the Washington Post and the New York Times brought this to the public’s attention.

The Trust Advisor Blog ran a story in January on this topic. At the time, many of our readers and our contributors said this was too good to be true. And as often is the case, when something is too good to be true, it seldom is.

Now that the genie of public outrage is out of the bottle, there will certainly be an argument over whether Steinbrenner’s heirs will avoid up to $600 million in estate tax. Lawmakers in Washington are already using his good name to prevent billion-dollar estates from passing tax-free.

Senator Bernard Sanders (I-VT) and four co-sponsors have introduced a bill that would retroactively return the estate tax to the 2009 exemption level of $3.5 million with a progressive tax rate structure starting at 45% with a 10% surcharge on billionaires.

The debate started last March following the death of Texas pipeline mogul Dan Duncan, who died at 77 with an estimated net worth of $9 billion, ranking him as the 74th wealthiest person in the world. Under the Sanders proposal, that $9 billion would generate billions of dollars in government revenue.

Lawmakers had a chance to fix the estate tax several months ago, saving Duncan and Steinbrenner’s heirs millions, in a proposal that would have given Republicans just about everything they asked for, including a $5 million exemption rising with inflation and a maximum of 35% maximum rates. But because of party bickering, lawmakers couldn’t agree—and here we are.

Public outcry over billionaire dying tax-free makes great political theater, matching the fuss created in 1995 when President Bill Clinton and Congress plugged the expatriation loophole that let billionaires like Ken Dart escape U.S. estate taxes by renouncing their citizenship and moving to Belize.

Some of the strongest outrage has come from Congress itself. When asked to summarize Senator Sanders’ position, aide Michael Briggs pointed me to a speech he made the day Steinbrenner died.

“We have a situation now where the very wealthiest people in this country are seeing that when someone in their family dies, the estate tax is zero,” the senator said, concluding with “In my view, it is immoral it is unfair that while the middle class struggles to survive, millionaires and billionaire’s get tax breaks.”

Where the rhetoric meets the road

Given that sentiment, it’s not surprising that Sanders and his allies are pushing a bill that would retroactively tax Steinbrenner and others who have died in the last seven months. Meanwhile, Blanche Lincoln of Arkansas and John Kyl have revived their bipartisan proposal, and more would-be fixes and compromises will probably emerge over the next few months.

Right now, it’s all still political theater, says estate planner Phil Kavesh.

“I think this is definitely not going to get resolved until the November election, and at this point will probably be pushed back to January when the new Congress takes office,” he says.

The logic is a little cynical, Kavesh admits, but everyone I talked to agrees.

On one hand, every billionaire who dies is an embarrassment for lawmakers who were supposed to close the loophole last year.

But on the other, the longer the Senate keeps us all in suspense, the more time both Democrats and Republicans have to collect contributions from the upper-middle-class families that will be exposed to the estate tax next year if nothing happens.

“If the estate tax came back next year with only a $1 million exemption, that would be devastating for a lot of relatively middle-class people,” Kavesh notes.

More complicated than it looks

While some members of Congress may think it will be easy to bang out an amendment that raises the exemption back to $3.5 million, by the time November rolls around the budget could tie their hands.

Thanks to “pay as you go” rules, in order to exempt more estates from the tax means finding about $60 billion in additional revenue, or cutting that much from federal spending. Neither is an especially attractive option, but Sanders, Lincoln, Kyl and others are working on solutions.

The Sanders bill, for example, would create a special “billionaire’s tax” designed to spare 99.7% of all families from paying any estate tax at all, while skimming off 65% of what high rollers like Steinbrenner leave behind.

Retroactive headaches

“If I were the executor for the estate of Art Linkletter, George Steinbrenner, Dennis Hopper or any of the other wealthy people who’ve passed away in the past six months, I would be stalling any distributions until I got some clarity,” says Bill Ahern, policy director of the non-profit Tax Foundation.

That’s because Sanders wants to make his tax retroactive to the beginning of 2010 to bring in revenue from the billionaire deaths we’ve seen so far this year—assuming, of course, that they left any taxable assets behind and not in trusts or other tax-shielded vehicles.

“Sad but true, when people mention these billionaires dying in a year of no estate tax, I wonder in the back of my mind how much they would have paid last year,” Phil Kavesh says. “These people can afford very sophisticated legal counsel to avoid estate tax, but this topic has such political cachet that it may trap people in the upper middle class as well.”

Although Max Baucus and the Senate Finance Committee have backpedaled away from retroactivity as the year drags on, it’s anything but a dead issue, Bill Ahern says. As long as it gets the votes, it has a good shot at fending off any constitutional concerns.

“The Supreme Court has been very kind to retroactive taxation, especially within one year,” says Ahern.

Phil Kavesh isn’t so sure. “Quite frankly, retroactivity might not be a workable solution at this point in the year,” he says. “Enough big estates have been affected so far that there is a lot of money at stake, and that means a lot of money to fund fights in the court system that could go on for years.”

The silver lining for estate planners

As a result, Kavesh suspects we could end up with the $1 million exemption after all, at least for as long as it takes to work out a budget-neutral compromise.

Either way, he says it’s the best of times and the worst of times for estate planners. Those who can cope with all the moving parts in play can book a lot of business.

“What with the tax environment shifting as it is, a lot of my clients are seriously looking at taking measures before the end of the year,” he says.

“There’s a lot of rumbling about additional restrictions on certain types of trusts going forward, so whatever happens to the exemption, the time for them to act is now.”

Jerry Cooper, senior editor, The Trust Advisor Blog. Steven Maimes and Scott Martin contributed to the research and reporting.

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