Senate Talks May Lead to Compromise on Estate Tax

Republicans in Congress are renewing their drive to abolish the estate tax for good, but some party leaders fear their long-held goal remains out of reach despite significant GOP gains in the 2004 congressional elections.

As a result, a senior GOP senator has opened negotiations with Democrats on a possible compromise that would keep the tax in place but apply it only to very large estates.

That would allow most taxpayers to pass wealth on to their heirs tax-free. But it would mark a retreat by President Bush and GOP activists from their demand for the full repeal of what they call the death tax.

The House today is expected to easily pass legislation to repeal the estate tax, as it has twice before. But the Senate has always been the stumbling block.

It is far from certain that a compromise can be struck to get estate tax repeal through the Senate. But the fledgling negotiations -- between Sen. Jon Kyl (R-Ariz.), a stalwart proponent of repealing the tax, and Sen. Charles E. Schumer (D-N.Y.), tapped by Democratic leaders for the job -- are the first sign of movement on the issue in years.

The talks raise the prospect that Congress will summon a rare show of bipartisanship to end the uncertainty that has shadowed estate planning for many families, especially in California and other states where high property values have swollen inheritances.

The uncertainty stemmed from the 2001 law that cut a range of taxes, but only through 2010. Under the measure, the estate tax rate has declined and will end in 2010 but be reinstated in 2011.

Republicans have promised to make the repeal permanent, but so far they have failed to achieve that.

“Sen. Kyl in his heart still wants full repeal, but we don’t have the votes,” said Kyl’s spokesman, Scot Montrey.

Republicans are divided by the push for a compromise by Kyl and other party leaders. Some anti-tax activists, including the influential small-business lobby, oppose compromising. And some GOP strategists would rather use the issue against Senate Democrats in the 2006 campaign and, they hope, build a stronger majority for abolishing the tax.

“The smart move for Republicans,” said Grover Norquist, president of Americans for Tax Reform, a tax-cut advocacy group, is to schedule a Senate vote on repeal and then, “win, lose or draw,” target the Democrats who voted against it.

Under current law, the first $1.5 million of an estate is exempt, with the rest taxed at 47%.

According to the nonpartisan Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution, the tax was paid on only 30,627 estates in 2003 -- 5,631 of them in California.

Although relatively few people pay the tax, it brings in lots of revenue. The Tax Policy Center reported that 2003 estate tax revenue surpassed $20 billion.

Advocates of repeal argue that the tax punishes people who work hard to save assets over a lifetime. They say it is unfair to family farms and small businesses because some heirs have to liquidate those enterprises to pay the tax.

Opponents of repeal say the deficit-ridden federal government cannot afford to lose all estate tax revenue and that scrapping the tax would benefit only the wealthy.

Estate tax critics won a big victory in Bush’s 2001 tax cut, when Congress voted to gradually reduce the inheritance tax -- which was then 55% on the amount in excess of $1 million -- and have it repealed in 2010. But because the entire tax law was written to expire after 2010, a provision to hold down its price tag, the 55% estate tax is scheduled to be reinstated in 2011.

The House passed legislation in 2002 and 2003 to permanently repeal the levy. But the bill has stalled in the Senate, where supporters have not had the 60 votes needed to cut off Democratic filibusters.

When the issue last came to a Senate vote in 2002, it was backed by 54 senators, including nine Democrats. Two absent Republicans were also counted as supporters.

Some repeal advocates believe the 60-vote threshold would be met if the issue came to a vote this year, thanks to the GOP’s four-seat gain in 2004. But others say the bill could again fall short amid growing concern about the size of the budget deficit.

Sen. George V. Voinovich (R-Ohio), for instance, voted to repeal the estate tax in 2002 but now favors reducing it -- not eliminating it -- because of the deficit. “Outright repeal is something that may be out of reach,” said spokesman Scott Milburn.

Some Democrats facing reelection in 2006 are wary of the issue, recognizing that many voters support a repeal.

“There’s a lot of Democrats who don’t want to have another vote where they are being called pro-death tax,” said a Senate aide who requested anonymity.

Senate Minority Leader Harry Reid (D-Nev.) has deputized Schumer and Sen. Max Baucus (D-Mont.), the ranking Democrat on the Finance Committee, to try to craft a compromise. “We Democrats are very interested” in an accord, Reid said Tuesday. “We believe that there should be a change in the estate tax, and we are working toward that goal.”

One option reportedly being discussed by Republicans would apply the tax only to estates worth at least $10 million and drop the rate to 15%. But many Democrats say such a rollback would go too far.

When the House debates the issue today, Rep. Earl Pomeroy (D-N.D.) is planning to offer a Democratic alternative that would raise the exemption to $3 million per person. He believes that formula would free more than 99% of Americans from the estate tax and cost one-quarter the amount of a full repeal.

“We’re approaching this in the deepest deficit our country has ever been in,” Pomeroy said. “Under that circumstance, making the estate tax go away for 99.7% of people represents a pretty substantial achievement.”

The National Assn. of Independent Businesses opposes any proposal short of full repeal, even an option that would exempt small businesses. “The only thing that’s going to work for everybody is to repeal it,” said lobbyist Dena Battle. “The idea that you can keep an unfair tax in place is unfair.”