Senate Vote Blocks Repeal of Estate Tax

WASHINGTON -- President Bush’s drive to permanently repeal the estate tax died in the Senate on Wednesday, despite intense election-year pressure on Democrats to back the move.

A majority of the Senate voted for the repeal, 54 to 44. But that fell short of the 60-vote threshold needed to clear a crucial procedural hurdle that would allow a final vote on the bill.

Chances of reviving the bill later this year are slim. But Republicans pledged to keep the fight over the so-called death tax alive by trumpeting the issue in this year’s congressional campaigns--especially against Democrats running for reelection in farm states where the tax has hampered some heirs’ ability to inherit family farms.

Sen. Phil Gramm (R-Texas) predicted Wednesday’s vote would be a “defining issue” in the choice between Democrats and Republicans this November. “We will have a referendum on the death tax on election day,” he said.

In a rare break in a Congress marked by party-line votes, nine Democrats joined 45 Republicans to support eliminating the estate tax. Voting against it were 41 Democrats, two Republicans and one independent.

Among the Democrats voting against permanent repeal were two of the party’s most vulnerable Farm Belt incumbents who are seeking reelection this year--Sens. Tim Johnson of South Dakota and Jean Carnahan of Missouri.

California’s senators--Barbara Boxer and Dianne Feinstein, both Democrats--voted against the repeal bill. Feinstein was one of 12 Senate Democrats who last year voted for the massive tax cut measure that Bush pushed through Congress, which included a temporary repeal of the estate tax.

All of the provisions of last year’s $1.35-trillion tax cut law expire at the end of 2010. Under the law, the estate tax gradually decreases before ending in 2010. But on Jan. 1, 2011, the tax is to return to its 2001 rates, which means the largest estates would face a 55% levy.

Sen. Christopher S. Bond (R-Mo.) called the prospect of the tax’s return “a Dracula-like figure springing out of the grave.”

But Democratic critics said that permanently repealing the tax is a luxury that Congress cannot afford at a time when the government’s deficit is growing--unlike a year ago when the federal budget was in the black.

Wednesday’s Senate vote effectively ends any prospect that this year’s Congress will decide to make permanent any part of the 10-year tax cut law. Among its provisions, which include a cut in income tax rates, the move to end the estate tax had the most political momentum.

The Republican-controlled House last week approved the bill to permanently repeal the tax in a vote that underscored the proposal’s political appeal: 41 House Democrats broke ranks with their leadership and joined 214 Republicans and one independent in supporting the measure.

At issue is the inheritance tax paid by heirs. Currently, any estate valued at $1 million or less is exempt, so only a fraction of estates are affected. In 1999, the most recent year for which figures are available, 49,870 estates paid the tax. That included 7,445 in California, more than any state.

Critics of the tax say its cost should be measured not just in the money paid to the government from inheritances, but in the billions of dollars a year that people pay in estate planning and special life insurance to avoid or reduce their prospective tax burden.

On Wednesday night, Bush called the Senate vote “a disappointment to the American people.” He added: “The Congress must fix this unfair tax and provide families with certainty so they can plan for the future.”

The “sunset” provision in last year’s tax cut law was included for political and procedural reasons. Authors of the bill included it to keep down the bill’s price tag and because they did not have the 60 votes needed under Senate budget rules to cut taxes for more than 10 years.

Bush and his allies call the provision a quirk that should be eliminated to implement Congress’ intent of eliminating the estate tax. They said keeping even a remnant of the tax amounts to a form of income redistribution that hurts people who worked hard to accumulate wealth over their lifetime.

“I see this as an affront to those who want to pass on the fruits of their hard work to their children,” said Sen. Wayne Allard (R-Colo.), who is up for reelection this year in a state with considerable agricultural interests.

One reason the estate-tax repeal has proved less partisan than other issues is that the tax’s most vocal critics include the influential farm and small-business lobbies. They argue that because the estate tax is so steep, some who inherit family farms and businesses have to liquidate those enterprises to pay the tax.

“People affected by this tax are not necessarily wealthy,” Allard said.

Congressional analysts say that permanently repealing the estate tax would cost the government about $25 billion in 2011 and $56 billion in 2012.

Critics of the repeal expressed particular concern about the cost in subsequent years--precisely the time when a majority of the baby boomer generation begins to retire and puts a huge financial strain on the government’s retirement programs. According to projections by the liberal Center on Budget and Policy Priorities, repeal of the estate tax would drain $740 billion in federal revenue between 2013 and 2022.

In the Senate debate, some Democrats argued that the money would be better spent on domestic programs than on a tax break that goes mostly to the wealthy.

“Strip it all away, this is a tax relief for billionaires when we have a very big deficit and we have other priorities,” said Sen. Byron L. Dorgan (D-N.D.).

Senate Budget Committee Chairman Kent Conrad (D-N.D.) offered a Democratic alternative that would roll back but not repeal the estate tax. Conrad’s plan would have raised the amount exempt from taxation to $3 million in 2003 and to $3.5 million in 2009 and beyond.

At that point, the tax would apply to only 0.3% of all estates, according to Conrad. But that alternative was rejected, 60 to 38.

White House Press Secretary Ari Fleischer, expressing Bush’s opposition to that proposal, said there were no grounds for discriminating among estates in applying the tax.

“If it’s wrong to tax people because they die, it’s wrong to tax people because they die at whatever amount of income they have,” Fleischer said.

Another Democratic alternative, which was rejected, 54 to 44, would have raised the exemption to $4 million and provided a special tax exemption for family farms and businesses.

That amendment was co-sponsored by Carnahan, who is facing a tough reelection challenge from former GOP Rep. James M. Talent. Talent has made permanent repeal of the estate tax a central campaign issue.

Just this week, as Bush appeared with him at a fund-raiser in Kansas City, Mo., Talent called the estate tax the “stupidest of stupid taxes.”

Carnahan defended her votes on the issue, noting her alternative would have provided immediate estate tax repeal for small businesses and farmers, while the current law delays that relief for years.

“The argument about whether you should repeal the estate tax for billionaires is different than if you want to support it for farmers and small business,” said Roy Temple, Carnahan’s chief of staff.