Congress May Reduce Estate Tax, But Not Likely to Repeal It Outright
By JOHN D. MCKINNON and SHAILAGH MURRAY Staff Reporters of THE WALL STREET JOURNAL
WASHINGTON -- The death tax may be proving hard to kill.
While chances remain strong in Congress for some kind of federal estate-tax rollback this year, it is looking increasingly doubtful that large estates will escape federal taxation altogether, as advocates had hoped.
When the House starts hashing out its estate-tax cut some time in the next few weeks, it is likely to approve reforms that significantly reduce federal taxes on large estates, but don't quite erase them.
In the most likely scenario -- one that is already being quietly promoted by some GOP congressional leaders as well as advisers to President Bush -- Congress would repeal the current estate tax but place new capital-gains tax liability on assets inherited from estates above, say, $2 million or so. The tax could be avoided as long as an heir held onto an inherited asset. But when the heir sold it, he or she would have to pay capital-gains tax on all the gain, including the gain that the previous owner had built up, perhaps over a lifetime.
And even that modified repeal isn't a sure thing, given opposition from many Democrats and some in the estate-planning industry, as well as the increasingly bruising competition from other interest groups for a spot on the tax-cut train.
President Bush, who campaigned for full repeal, might well still propose it in his budget later this month. But in an interview last week, Bush economic adviser Lawrence Lindsey said for the first time that he is "commending" the capital-gains approach as "the most sensible."
Mr. Lindsey contends it simply would be unfair to allow appreciated assets to escape all tax. But a related reason is almost certainly the cost of such an approach. Last year, Mr. Bush's outright repeal was estimated by the congressional Joint Committee on Taxation to cost $236 billion over 10 years -- more than twice the $105 billion cost of the modified repeal. And that cost is expected to grow when analysts complete this year's calculations.
More broadly, estate-tax relief, which would directly benefit only the top 2% of estates, simply isn't as high a priority for the Bush team as is cutting marginal tax rates across the board. In fact, the administration's focus on stimulus is bound to keep estate-tax repeal near the bottom of its to-do list on taxes.
The upshot is that estate-tax repeal may have trouble competing politically with more broad-based reforms in the legislative bargaining that lies ahead. With middle-class priorities such as marriage-penalty relief and an expanded child credit to choose from, as well as business breaks, Congress "will start horse trading," said Clint Stretch, director of tax policy for Deloitte & Touche.
In addition, insurance, charitable and other interests that are potentially hurt by estate-tax repeal are suddenly becoming more vocal. Insurance interests, which profit from selling policies designed to pay for the tax, are helping to fund an advocacy group called ASsETS -- Americans for Sensible Estate Tax Solutions -- that is pushing smaller reforms such as increasing exemptions and reducing rates. It has brought in former Wyoming Sen. Alan Simpson, a friend of Vice President Dick Cheney, as a spokesman.
Some supporters of all-out repeal concede this worries them. "We see groups of people opposing the repeal of the death tax who" benefit from its continuation, said Rep. Jennifer Dunn (R., Wash.), at a recent congressional hearing.
The antirepeal effort got a big boost last week when George Soros, Warren Buffett and the father of Microsoft Chairman Bill Gates joined other wealthy Americans in expressing support for an antirepeal petition.
One important part of the Republican base, the small-business community, is sure to keep fighting for full repeal. Officials at the National Federation of Independent Business, for instance, remain confident that repeal is on track.
Still, the political crosscurrents suggest that even modified repeal ultimately could nose-dive. A few Democrats who voted to kill the estate tax last year are noticeably less enthusiastic about the issue now. Even some Republicans are pushing alternatives to repeal. GOP Rep. Mark Foley, whose district includes Palm Beach, Fla., recently filed his own legislation that would increase the basic exemption to $5 million while leaving the tax in place.
One problem facing repeal advocates is the expectation that the price tag attached to all repeal plans is likely to go up significantly this year, as analysts assess how savvy taxpayers would maneuver to avoid other taxes as well in a post-estate-tax world. Currently, assets passing through estates generally escape tax on their existing capital gains; the rules essentially wipe the slate clean for whoever inherits the property. Now, analysts are realizing that by eliminating the estate tax, Congress would be vastly increasing the incentive for owners of appreciated assets to avoid selling them during their lifetimes, so they could pass them tax-free through their estates. That would mean the loss of not only the estate-tax revenue in the long run but also capital-gains revenue in the short term.