The Coming Senate Showdown over Estate Tax Reform

The House voted Wednesday 272 to 162 to permanently abolish the federal estate tax, just in time for the April 15th tax day media cycle. For the third time in four years, House leaders staged a vote to put pressure on the Senate, where the fate of America's only tax on accumulated wealth remains in the balance.

In the Senate, 60 votes are required to permanently repeal the estate tax. Advocates of repeal are dangerously close to that threshold – and the pressure that has been placed on a dozen swing senators is intense. At the same time, Senate Minority Leader Harry Reid (D-NV) has designated Sen. Charles Schumer (D-NY) to meet with leading repeal advocate Sen. Jon Kyl (R-AZ) to negotiate reform compromise proposals. An estate tax vote in the Senate is anticipated later this year.

The reason for "permanent" repeal lies in the way the 2001 tax cut was structured. That law phases out the estate tax between now and 2010; the amount of wealth exempted rising from $1.5 million to $3.5 million for individuals, double that for couples. In 2010, the tax will be completely repealed … for one year. If Congress takes no action, the 2001 tax law will sunset and the estate tax will return at its pre-2001 levels, including a $1 million individual wealth exemption and 55 percent rate structure.

The push for repeal comes from a coalition of anti-tax zealots, business trade associations, newspaper owners, and lobbying firms like Patton Boggs, representing some of America's wealthiest families, including the Mars and Walton clans. But the fiscal and political case for complete estate tax abolition gets weaker by the day.

In the context of prolonged budget deficits, abolishing a tax that will generate almost $1 trillion in revenue over the next two decades is fiscally irresponsible. So agrees Sen. George Voinovich (R-OH) and a handful of other moderates in both parties who might dislike the "death tax," but abhor the prospect of red ink for decades to come.

Meanwhile, states are voting with their feet to preserve revenue from taxing wealthy estates. This year, the "state credit" portion of the federal estate tax expires, leaving states that previously "piggy-backed" on the federal law bereft of hundreds of millions of dollars. As a result, seventeen states have voted to retain their own state-level estate taxes, a pragmatic response in the face of tight state budgets. This May, legislative leaders in Washington state are likely to institute a new estate tax at the initiative of recently elected Governor Christine Gregoire.

The wartime context also raises moral questions about the timeliness of abolishing the estate tax. A number of commentators and politicians have pointed out how unseemly it is for Congress to zealously protect every dime of Paris Hilton's inheritance while other families are holding bake sales to buy body armor for their children serving in Iraq. This grotesque inequality of sacrifice is not lost on some veterans groups. "During the Civil War, rich people could buy their way out of the draft," said Charlie Richardson, co-founder of Military Families Speak Out. "Now the wealthy don't have to pay anything to avoid military service – and they get big tax cuts on top."

Senator John McCain recently observed that cutting taxes for the very wealthy during a time of war is historically unprecedented. "In the last year we have approved legislation containing billions and billions of dollars … in pork barrel projects, huge tax breaks for the wealthy, and a corporate tax bill estimated to cost $180 billion. This is a far cry from sacrifice." Historically, wealth has been "conscripted" to pay for war costs and debts.

The upcoming battle in the Senate will be over competing reform proposals. One proposal, floated by Sen. Jon Kyl, would raise the amount of wealth exempted by the tax to $15 million and apply a rate of only 15 percent, compared to the current rate of 49 percent. This is clearly part of an incremental strategy to mortally wound the tax and abolish it later.

The case for responsible estate tax reform is compelling. Responsible Wealth advocates raising the exemptions to $2 million for individuals and $4 million for couples, while simplifying and liberalizing provisions and easing the transfer of the few closely held businesses subject to the tax. We propose reinstating the state credit, so states do not create a mismatching patchwork of state laws, but can simply piggyback on a reformed federal law. We advocate for a progressive rate structure, dropping the rate on estates below $5 million to 40 percent with incremental steps to a top rate of 65 percent on estates over $20 million.

This progressive rate structure in our reform proposal invokes the historical intent of the tax, as articulated by Teddy Roosevelt and Andrew Carnegie, to thwart the build-up of "wealth dynasties" that threaten to undermine democracy. During World War II, FDR won approval of a top rate of 70 percent on dynastic fortunes over $50 million, ensuring that even Daddy Warbucks shared in the wartime sacrifice.

Such a responsible reform would preserve most of the revenue generated by the estate tax, continue to encourage an estimated $10 billion a year in charitable giving, and encourage the wider dispersion of wealth, rather than its accretion in fewer and fewer hands.

Chuck Collins is senior fellow at United for a Fair Economy and Responsible Wealth, which advocates for estate tax reform (See: http://www.faireconomy.org/estatetax/index.html). He is coauthor with Bill Gates Sr. of Wealth and Our Commonwealth: Why America Should Tax Accumulated Fortunes (Beacon).