Reform, not repeal

Our position: Estate tax shouldn't be dropped but deserves higher exemptions.

Published: August 6, 2005

After a binge of spending and tax cutting that will add tens of billions of dollars to this nation's mushrooming debt, Congress has taken a break for its annual August recess. Thank goodness.

But when members return to Capitol Hill next month, the Senate is expected to consider a House proposal that would do further damage to America's balance sheet: a permanent repeal of the federal tax on estates. The timing couldn't be much worse.

With Congress unwilling to bring taxes and spending in line, the federal government is stuck in a rut of annual budget deficits. The House estate-tax proposal would add almost $290 billion to those deficits over the next decade, according to Congress' Joint Committee on Taxation.

Yet there is good reason for federal lawmakers to revise the current plan for the estate tax. The $1.35 trillion tax-cut package that they passed in 2001 called for the estate tax to be phased out gradually until it disappeared in 2010. But under a gimmick designed to hold down the overall tab for the package, the estate tax would return in 2011. Almost no one expects that to happen.

The sooner Congress settles the uncertain future of the tax, the sooner those who might be subject to it can plan for it. That's only fair.

Lawmakers are not facing an all-or-nothing choice between repealing the estate tax and leaving the current, irrational schedule intact. By keeping the tax but raising the value of estates exempt from paying it, Congress could exclude all but the wealthiest U.S. estates from any liability while reducing the cost to the Treasury from a full repeal.

For example, raising the exemption level of $1.5 million to $3.5 million -- $7 million for couples -- would spare 99.7 percent of all estates from the tax. With a top tax rate of 45 percent -- lower than this year's top rate -- the cost to the Treasury would be less than half that of a full repeal.

Some senators have been calling for a "compromise" that would raise the exemption level to $10 million per individual and $20 million per couple while cutting the top tax rate on estates to 15 percent. But the cost to the Treasury would be almost as high as repealing the tax altogether, because it would apply to so few estates.

Advocates of repealing the estate tax, including President George W. Bush, have argued it is wiping out family farms and businesses by forcing heirs to liquidate them to pay their obligations to Uncle Sam. But a study from the nonpartisan Tax Policy Center found that, nationwide, just 440 estates made up primarily of farm or business assets paid the tax last year. The average tax bill was less than 20 percent of the value of the estate. And the law allows families facing tax bills of at least 35 percent of the estate to stretch out payments over 14 years.

Reform of the estate tax makes sense. In the current budget environment, repeal does not.