The House voted 272 to 162 yesterday to permanently repeal the estate tax, throwing the issue to the Senate where negotiations have begun on a deep and permanent estate tax cut that can pass this year, even if it falls short of full repeal.
The House vote pitted repeal proponents, who held that a tax on inheritances is fundamentally unfair, against Democrats, who questioned how Congress could support a tax cut largely for the affluent that would cost $290 billion over 10 years, in the face of record budget deficits.
"This is reverse Robin Hood," said House Minority Leader Nancy Pelosi (D-Calif.). "We're taking money from the middle class and giving it to the super-rich."
"The death of a family member should not be a taxable event, period," said Rep. Kenny Hulshof (R-Mo.), the bill's sponsor.
By a 194 to 238 vote, the House rejected a Democratic counteroffer, which would have shielded $3.5 million of an estate's value from taxation, enough to exempt 99.7 percent of estates from the inheritance tax, according to the Urban Institute-Brookings Institution Tax Policy Center. Members then approved the measure, strongly backed by the White House, that would make a full repeal permanent. The repeal is scheduled to take effect in 2010, then disappear in 2011.
The real fight will come in the Senate, where repeal supporters still appear just short of the 60-vote majority needed to break a promised Democratic filibuster. The Republican leadership, backed by Senate Finance Committee Chairman Charles E. Grassley (R-Iowa), has authorized Sen. Jon Kyl (R-Ariz.) to strike a deal that will win 60 votes.
"He's got wide latitude to see what he can get," said Mitch McConnell (R-Ky.), the Senate majority whip.
For the Democrats, Sen. Charles E. Schumer (N.Y.) is leading negotiations, which have raised the prospect that the long-standing stalemate on the estate tax could be broken this year.
President Bush's 10-year, $1.35 trillion tax cut in 2001 included a slow phaseout of the estate tax by 2010, but the tax is reinstated in 2011 when the entire 2001 tax law expires. As those dates approach and concern grows over record budget deficits, some family-owned businesses and affluent heirs have begun appealing to lawmakers for a deal that would provide estate-planning certainty, even if it means setting aside full repeal.
Grassley has thrown his weight behind that effort. "We need certainty," said a Republican Finance Committee aide. "We cannot continue on with this course."
That uncertainty has begun splitting the once-steadfast coalition of affluent families, small business groups and farming organizations that have pushed full repeal for more than a decade. Lobbyists from Patton Boggs, backed by the heirs of the McLean-based Mars candy fortune, among others, are pushing the lowest estate tax rate they can get. Small-business lobbyists want the highest exemption they can get.
In deference to both those positions, the Republican starting position would set the value of an estate excluded from taxation at $10 million, with a 15 percent tax rate for estates larger than that. The value of estates sold by their heirs would be calculated based on their worth at the time of their owner's death, rather than current law, which sets the gain in value of an estate at the cost of the estate's assets when they were first purchased.
"If the United States Senate came up with $10 million-per-person exemption and a 15 percent rate similar to capital gains, almost everybody in the small-biz community would be thrilled with that," said David K. Rehr, president of the National Beer Wholesalers Association.
But the cost of that would likely be almost as high as a full repeal, since virtually no estates would remain subject to tax.