Senate rejects effort to abolish estate tax; GOP leaders pledge to try again

By Richard Wolf
USA TODAY

WASHINGTON The Senate refused Thursday to kill the estate tax on inherited wealth, marking the clearest sign yet that at least some of the tax cuts passed at the initiative of President Bush in 2001 won't be made permanent.

The effort failed when a group of mostly Republican senators who wanted to repeal the tax failed to get the 60 votes needed to overcome a Democratic filibuster; they fell short, 57-41.

Republicans quickly began touting a compromise that would exempt more families and small businesses and reduce rates on others. Majority Leader Bill Frist, R-Tenn., promised more votes this year.

By blocking repeal now, however, most Senate Democrats and two Republicans dealt a blow to Bush's top domestic priority: making the tax cuts passed in 2001 and 2003 permanent. Opponents of the estate tax say killing it will be even more difficult after this fall's elections, when Republicans are expected to suffer losses.

"If we can't do it now, it's very hard to imagine how we do it in the near future," said Pat Toomey of the fiscally conservative Club for Growth. "I'm afraid we're going to be staring tax increases in the face."

For years, the levy opponents call the "death tax" has been near the top of the GOP tax-cutting agenda. Critics argue that a tax at death is immoral. Frist on Thursday called it "the buzzard tax" that arrives "right after the grim reaper."

The 2001 tax cuts gradually reduced the estate tax rate from a high of 55%, while increasing the exemption for smaller estates. This year, the tax rate is 46% and estates smaller than $2 million are exempt from the tax. In 2010, the estate tax is wiped out altogether, but in a money-saving move, it comes back at its original level in 2011.

Bush and Republican congressional leaders want to make all their tax cuts permanent after 2010, including full repeal of the estate tax. But Thursday's vote indicates a smaller estate tax is likely to remain. The struggle to make other tax cuts permanent will continue; some middle-class tax cuts, such as an increase in the child tax credit, are broadly popular and may be easier to extend. Others, such as a 15% capital gains tax rate, could face more opposition.

First established in 1916, the estate tax looked like a strong candidate for repeal last year. The GOP-controlled House already had voted 272-162 to kill it; Senate action was slated for September. Then Hurricane Katrina struck the Gulf Coast, hijacking the congressional agenda.

Since then, support for repeal has waned for several reasons:

The post-Katrina focus on poverty and suffering made it tougher for lawmakers to cut taxes on the rich. Fewer than 1% of Americans face the prospect of estate taxes.

Proponents of the estate tax, such as Bill Gates Sr., have made more forceful arguments. Gates, the father of the world's richest man, said those with large estates owe much of their success to government innovation. "I call it the 'grateful heirs tax,' " he said.

More attention is being paid to the estimated $300 billion federal deficit and the rising costs of the Iraq war, Medicare and Social Security. Repealing the estate tax would cost about $1 trillion over 10 years, according to the non-partisan Tax Policy Center.

"The world is very different from when these tax cuts were first implemented," said Maya MacGuineas of the bipartisan Committee for a Responsible Federal Budget. "The deficit picture is making a number of senators queasy."

Sen. Jon Kyl, R-Ariz., is floating a compromise that would exempt the first $5 million for individuals and $10 million for couples; reduce the tax rate to 15% on estates up to $30 million; and impose a 30% rate above that level. It has attracted support from many Republicans. The Tax Policy Center, however, says it would cost about 80% as much as full repeal.

About 30,000 estates were taxed in 2004 because their value exceeded the 2003 exemption of $1 million, according to the latest figures available. That exemption rises gradually and hits $3.5 million in 2009, when the Tax Policy Center estimates only 7,200 estates will owe taxes. Number who paid estate taxes in 2004:

Estate size Number of filers Average tax paid

$1 million - $2.5 million 21,152 $175,000

$2.5 million -$5 million 5,630 $825,000

$5 million -$10 million 2,166 $2 million

$10 million $20 million 808 $4 million

More than $20 million 520 $10.8 million