Repeal of Estate Tax Is Approved in House

The House on Wednesday overwhelmingly passed a bill that would repeal the estate tax, but take two years longer to do so than President Bush had sought.

The bill, approved 274 to 154, would phase out over the course of a decade billions of dollars the government collects in taxes each year from the heirs of large estates. In California, soaring home prices and--until recently--surging technology stock portfolios have made state residents more likely than many others to be subject to the tax.

The repeal faces uncertain prospects in the Senate, where the scope of Bush’s overall $1.6-trillion tax cut plan--which along with ending the estate tax would reduce income tax rates and provide married couples a tax break--encountered significant new obstacles Wednesday. In a surprise rebuff to Bush, the Senate tentatively agreed to slash the plan by $450 billion. That vote could yet be reversed, but it cast fresh doubt on the prospects that Congress ultimately will approve a tax cut as large as Bush seeks.

Nevertheless, the proponents of eliminating the estate tax said the broad support it received in the House, including 58 Democratic votes, makes them optimistic that the so-called death tax is on a course for extinction.

Critics complained that the measure gives a huge break to the small fraction of mostly wealthy Americans who face the estate tax, and counts on budget surplus projections so speculative that the country may not be able to afford the repeal when it finally kicks in.

A similar measure that passed both houses of Congress last year was vetoed by then-President Clinton. But Bush made abolishing the estate tax a key issue in his campaign for the White House.

Bush hailed the House action Wednesday as “a victory for fairness and a vote for economic growth.”

The House has now passed as separate bills the major pieces of Bush’s overall proposal to reduce taxes by $1.6 trillion. Last month, the chamber approved an across-the-board cut in income tax rates and the tax reduction for married couples. The Senate plans to consider these elements in a single piece of legislation.

The estate tax repeal, sponsored by Rep. Jennifer Dunn (R-Wash.), would benefit a much smaller group of taxpayers than these earlier cuts approved by the House. The estate tax affects only 2% of people who die each year, mainly because it doesn’t apply to the first $675,000 of an estate’s value. That exemption figure, adjusted annually, is scheduled to rise to $1 million by 2006.

But a repeal of the tax has gained momentum over the last decade partly because foes increasingly called attention to its impact on two politically influential groups: farmers and small businesses.

Owners of these mid-sized enterprises often have land and other assets worth enough to trigger the tax, but don’t make enough money to hire lawyers and financial advisors to help them avoid the tax, its foes say.

“The death tax is really aimed at businesses that can’t afford to do elaborate estate planning,” said Rep. Christopher Cox (R-Newport Beach), a strong advocate of the repeal.

Under current law, the government requires those who inherit estates subject to the tax to pay between 18% to 55% of their value to the government. The bill passed Wednesday would gradually cut those top tax rates to 38% by 2010 before abolishing the tax entirely in 2011.

Some of the bill’s impact would be offset by higher capital gains tax liability that some individuals would face when selling inherited assets.

Overall, the repeal would reduce government revenue by $185.5 billion over the next 10 years, according to congressional staff estimates. Bush’s tax cut package proposed ending the tax by 2009, which would have cut government revenue by an estimated $267 billion.

Opponents said the full effect of repealing the tax is to drain federal tax receipts just as baby boomers begin signing up for Social Security and Medicare in droves.

“This is a mistake we will pay for for years to come,” said House Minority Leader Richard A. Gephardt (D-Mo.), who called the repeal’s slow phase-in “a gimmick . . . an attempt to white out the cost and keep the numbers down.”

The repeal was opposed by some of the nation’s wealthiest individuals, including the father of Microsoft Corp. Chairman Bill Gates, and billionaire financiers George Soros and Warren E. Buffett. The group took out newspaper ads in recent weeks attacking the repeal as an unnecessary boon to the rich and a threat to charitable foundations that thrive on gifts from wealthy individuals seeking to avoid paying the estate tax.

But during House debate Wednesday, Rep. David Dreier (R-San Dimas) brushed aside those appeals, saying, “We’re going to provide Bill Gates and Warren Buffett relief whether they want it or not.”

Business groups, such as the National Federation of Independent Businesses, the American Farm Bureau Federation and the U.S. Chamber of Commerce, lobbied vigorously for the bill.

A number of African American business leaders also endorsed the repeal, saying the estate tax threatens the ability of a growing number of minority business owners to preserve the wealth they’ve accumulated for their families.

Democrats had offered a substitute to the bill that would not have repealed the estate tax, but would have given speedier relief to most individuals subject to it.

Sponsored by Rep. Charles B. Rangel (D-N.Y.), the proposal would have raised exemption levels to $2 million for individuals, and $4 million for couples, starting next year. Rangel said the measure would have eliminated estate tax liability for all but the wealthiest 25% of those currently forced to pay it.

But the measure was defeated, 227 to 201, with several Republicans arguing that their objective was to kill the estate tax, not merely cut it. “If we leave any portion of this tax intact, this tax will grow back,” Dunn said.

Dunn and other backers of the repeal bill acknowledged Wednesday that the Senate could take a different approach, possibly reducing instead of eliminating the estate tax.

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Times staff writers James Gerstenzang in Washington and Liz Pulliam Weston in Los Angeles contributed to this story.

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More Inside

TAX CUT SETBACK: The Senate votes to reduce Bush’s $1.6-trillion tax cut plan by $450 billion, A23