GOP Inherits Momentum to Reduce Federal Estate Tax

If nothing is more certain than death and taxes, nothing seems more ill-timed than the tax on death.

That’s the sales pitch Republicans in Congress are making as they pursue an aggressive--and so far, surprisingly successful--campaign to build support for cutting the federal estate tax.

The fact that the estate tax has risen to the top of the tax-cutting agenda is a tribute to the power of the small-business and farm lobbies. The groups have won sympathetic hearings both from Republicans and Democrats for the argument that the tax often forces heirs to sell family-owned businesses or farms to pay the tax collector.

Congress will be hard-pressed to find room in the budget this year for any tax cuts and Republicans already are drastically scaling back last year’s ambitious tax-slashing plans. Even so, the estate tax cut is emerging as one of the few proposals most likely to slip through.

When Speaker Newt Gingrich (R-Ga.) named the party’s top tax-cutting priorities this week, he cited only estate tax cuts and two perennial GOP favorites, capital gains tax relief and new credits for families with children. “There is no reason you should have to talk with the IRS and the undertaker the same week,” Gingrich said.

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Success could come at a cost, however. Cutting the estate tax could hamper Republicans’ efforts to shed their image as a party of the rich because the tax is levied only on estates valued at $600,000 or more. The GOP is talking about far broader benefits for the wealthy and big business interests.

The estate tax ranges from 37% to 55% depending on the estate. (The 55% rate kicks in at the $3-million level.) In addition, assets left to a spouse are not subject to the tax. This means that only 1.7% of all estates are expected to be taxed in 1997 for total federal revenue of about $19 billion.

The estate tax has been debated for years, with critics arguing that it is an unseemly way to raise revenue and that it amounts to a tax on wealth that has already been taxed.

“It makes the federal government the biggest grave robber in the world,” said House Majority Leader Dick Armey (R-Texas).

Sen. Max Baucus (D-Mont.) supports a deep cut in the tax because, he said, “as I listen to farmers, ranchers and small-business owners, one topic comes up every time: that’s the estate and gift tax.” Those groups tell him about “the burden [the estate tax] puts on agricultural producers and small businesses and how hard it is to hand down an operation to your sons and daughters,” he said.

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Anti-estate-tax sentiment has run particularly strong in California, where in 1982 voters passed a proposition repealing the state inheritance tax.

Congress’ Joint Committee on Taxation estimates that the number of estates subject to the tax will grow from 37,200 this year to 65,100 in 2005. But that is still only 2.5% of all estates, making the proposal a fat target for liberal Democrats who say that cutting or repealing the tax is a sop to the wealthy.

House Minority Leader Richard A. Gephardt (D-Mo.) recently released Treasury Department data showing that more than half the benefits of eliminating the tax would go to about 1,700 taxpayers a year.

Gephardt said that “about $50 billion over the next five years would go to just a handful of families--those with estates of $2.5 million or more.”

Even some Republicans privately concede that this is not the best message for the party to be sending. But the issue is being “driven by a confluence of interests that have surfaced on this issue,” said one Republican strategist who asked not to be named.

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At the forefront of those interests is a group that has been a key GOP ally: the small-business lobby, a broad coalition that includes the nation’s cattlemen, florists and vintners, as well as the influential National Federation of Independent Businesses. Also pushing for relief are farmers, a constituency that enjoys broad bipartisan support.

Both groups insist that the tax unfairly hits family businesses and farmers who often are not the wealthy scions of fortune that critics would make them out to be.

Lee Ann Goddard Ferris’ family has a 2,600-acre cattle ranch in Idaho that grosses about $350,000 a year. Testifying before the Senate Finance Committee, she said that, when her father died in 1993, an estate attorney calculated that the estate tax on the ranch will be $3.3 million when her mother dies.

“I’ll never forget his words: ‘There is no way you can keep this place, absolutely no way,” she said.

Baucus described the problem that the tax poses for farmers in Montana, where the average farm was worth $867,769 in 1995. For the average farmer, Baucus said, estate taxes typically force heirs to do one of three things: “First, subdivide the land and thus decrease production. Second, sell off part of the farm. Third, sell the whole thing.”

The Clinton administration and other Democrats acknowledge that this is a problem but they propose a narrowly targeted solution. An administration proposal would leave families owing the same amount but give them better payment options. Current law allows family-owned enterprises to defer the tax on $1 million of an estate, paying it over a 14-year period at 4% interest. The administration’s plan would increase the deferred estate value to $2.5 million and lower the interest rate to 2%.

Republicans, by contrast, are pushing a far broader proposal that reaches far beyond the problems of strapped family-owned businesses and farmers. GOP leaders have proposed increasing from $600,000 to $1 million the amount of assets excluded from the estate tax. They also have proposed substantial additional breaks for family-owned businesses, with no limit on the size of the business that could qualify.

Four of the five largest private companies in America are family owned, according to the Center on Budget and Policy Priorities.

Among those weighing the potential impact of the estate tax on their heirs and their businesses dealings is Los Angeles Dodgers owner Peter O’Malley. His decision to sell was based, at least in part, on his belief that his family would gain much more from selling the team now than it would if forced to sell after his death and pay estate taxes, said Bob Graziano, executive vice president of the team.

In fact, the Dodger team is such a large enterprise--worth hundreds of millions of dollars, Graziano said--that a cut in the estate tax probably would not make a big difference for the O’Malleys. Only abolishing the tax would do that.