By Jonathan Weisman
Washington Post Staff Writer
Wednesday, June 21, 2006; A04

Republican leaders announced yesterday that the House will vote this week on estate tax legislation that falls short of full repeal, conceding defeat on a philosophical issue that has been central to the GOP economic plank for more than a decade.

The bill, introduced by House Ways and Means Committee Chairman Bill Thomas (Calif.), marks a major turnaround for congressional Republicans, who for years have made "Death to the death tax" a political battle cry.

Ending the estate tax has also been a priority for President Bush, who in 2001 won passage of legislation that gradually raises the exemption and lowers the tax rate on inheritances until the tax is eliminated in 2010. But when that legislation expires in 2011, the estate tax is scheduled to return to the level it stood at before Bush was elected.

The Senate has blocked any effort to fully repeal the estate tax. Under the House's compromise, which probably will come to a vote tomorrow, estates worth as much as $5 million -- $10 million for couples -- would be exempt from taxation indefinitely.

The tax rate on estates worth more than the exemption level up to $25 million would be set at the same tax rates that apply to capital gains -- now 15 percent but scheduled to rise to 20 percent in 2011. The rate for estates worth more than $25 million would be twice the capital gains rate. The bipartisan Joint Committee on Taxation estimated the estate tax cut would cost the government $279 billion over 10 years.

To lure Democratic senators from Washington state and Arkansas, Thomas included a lucrative tax break for the timber industry, pushing the total cost of the bill to nearly $280 billion.

Senior House Republicans conceded that a long-sought permanent repeal of the estate tax is now out of reach. And with the possibility that Republicans will lose Senate seats in the midterm elections in November, GOP tax writers decided to grab the most lucrative deal possible in case Republican power begins to ebb.

"The sales message is very simple," Thomas said. "Do you want to make a statement, or do you want to make law?"

House Speaker J. Dennis Hastert (R-Ill.) conceded, "We need to do what is reality, what you can get done with the Senate."

Senators set the scramble for compromise in motion earlier this month when they fell three votes short of cutting off debate on legislation to permanently repeal the estate tax. That convinced the groups that have lobbied the issue for decades -- small-business groups, agriculture associations and extremely affluent families -- that the time had come to settle.

Senate Majority Leader Bill Frist (R-Tenn.) took the unusual step last week of asking Thomas to intervene, hoping House passage of a generous compromise would create the momentum needed to attract 60 votes in the Senate required to cut off debate. Frist has promised a vote on a compromise next week.

But passage is anything but certain. Republicans probably have the votes in the House, but Democrats will use the debate this week to highlight what they see as a flagrant GOP tilt to the rich.

House Democrats plan to offer a minimum-wage increase -- the first since 1997 -- as the alternative to the estate tax bill.

The search for a compromise has pitted affluent small-business owners against the truly rich -- families with estates valued at tens of millions of dollars.

Thomas came down in favor of the business owners. His legislation would ensure that married couples could leave their children estates worth $10 million, untaxed. But the most wealthy families could face estate taxes as high as 40 percent. And to trim the cost of the package, Thomas repealed a provision in the tax code that allows families with large inheritances to deduct the cost of state-levied death taxes from the federal estate tax.

To the powerful families that have bankrolled the estate tax repeal movement, Thomas's compromise may be too much to swallow, suggested Frank A. Blethen, publisher of the family-owned Seattle Times newspaper and a longtime advocate of repealing the estate tax.

"If this bill is what it looks like, a 40 percent tax on larger businesses, that's not much of a deal," Blethen said. "It is a huge disappointment."

Knowing how tight the vote would be, Thomas included a narrowly tailored measure, sought by Washington state's two Democratic senators, to offer strapped timber companies a two-year tax break worth $940 million.

Spokesmen for the senators, Maria Cantwell and Patty Murray, said the legislation is still being studied.