Estate tax fight hinges on money, morality

Opponents call it the "Paris Hilton Benefit Act." Supporters wax lyrical about abolishing the "death tax."

The wordplay is one indication that the Washington dispute over what to do with taxation of estates has become, to a degree, a moral argument.

And the volume of debate is rising, as Congress considers legislation that would permanently repeal the estate tax - affecting the Hilton Hotel heiress, other less visible millionaires, and the size of the federal budget deficit.

The issue arises from the 2001 tax-cut bill. That legislation gradually raises the value of an estate exempt from the tax, so that fewer people have to pay the tax over time. By 2009, only estates valued at more than $3.5 million will be taxed, and the legislation wipes out the tax entirely for 2010. But at the end of that year, the 2001 law's estate tax provisions "sunset." So the tax is reinstated in 2011, with an exemption for estates worth less than $1 million.

Tax cutters in Congress don't like that possibility. On April 15, the House passed a law making permanent the full repeal by a vote of 272 to 162.

But the Senate is another story. There, the Republican leadership has had difficulty rounding up the 60 votes necessary to avoid a filibuster. Sen. Jon Kyl (R) and other Republican leaders are pushing for resolution of the issue this month.

Hoping to win some Democratic support, Senator Kyl has suggested a compromise plan that would set the exemption at $8 million per individual and a top estate tax rate equal to the rate for capital gains, which is 15 percent.

The compromise hasn't won many converts among supporters of the estate tax. One group, United for a Fair Economy, has been running an ad in Oregon newspapers hoping to pressure Sen. Ron Wyden (D) to vote NO on repealing the tax.

"Should we fire 1,000 more teachers?" the ad asks. "Cut healthcare? Slash Social Security? And give the money to a few millionaires?" And Ms. Hilton gets her picture in the ad with a "no comment" cutline.

Ten years ago, repeal of the estate tax was regarded as a long shot. In his 1994 "Contract with America," Rep. Newt Gingrich (R) called only for a modest raise in the exemption.

Since then, the Republican antitax movement has joined with those morally opposed to the estate tax itself to convince many Americans that it is a problematic tax, explains Michael Graetz, a Yale Law School tax expert who has coauthored a book on the politics of the repeal drive.

The repeal campaign has had financial backing from many of what Professor Graetz calls "grass-tops supporters" - as opposed to grass-roots supporters. "Most of the money came from very ... wealthy holders of portfolio assets," he says.

Opponents of the estate tax say it is "double taxation" on income already hit by income taxation. But Graetz notes that most Americans face triple taxation - payroll taxes, income taxes, and sales taxes.

Both sides of the debate often frame their arguments in terms of morality. As Senator Kyl's website puts it: "The death tax is fundamentally unfair. It discourages hard work, entrepreneurship and savings, while rewarding consumption. It imposes tremendous planning costs on families, especially those owning small businesses and ranches."

Proponents of repeal used to list "family farms" as well. But they had great difficulty finding any farm family that had to sell its farm in order to pay the estate tax.

Opponents of repeal, on the other hand, have emphasized the loss of federal revenues from ending estate taxes. The 2001 act was passed when it looked like the federal budget faced huge surpluses in the years ahead. Since then, the budget has sunk into large deficits, making "fiscal responsibility" an argument used to support retention.

Repeal would cost roughly $1 trillion in the first 10 years of extension, 2012 to 2021 - $745 billion in lost revenues and $225 billion in increased interest payments on the national debt, notes the Center on Budget and Policy Priorities (CBPP).

Senator Kyl's proposed compromise would cost about 90 percent as much in revenues, says Joel Friedman, an expert at CBPP. The largest estate tax cuts would go to the largest estates.

The revenue losses would result in greater spending cuts for the nation's safety net programs and other popular programs, Mr. Friedman argues.

There's been another change since 2001. Many of the 1.3 million charities and foundations that benefit from inheritances and other donations - including museums, universities, and churches - have shifted from sitting on the fence on the estate tax, for fear of offending rich donors, to active opposition to repeal.

To escape the estate tax, many upper-income families donate heavily to charitable groups, and nonprofit advocates worry that getting rid of the tax would reduce this incentive. A study by the Congressional Budget Office calculates that repeal of the estate tax would reduce charitable bequests by 16 to 28 percent. That amount, in 2000, would have meant a loss of $13 billion to $25 billion, says Diana Aviv, president of Independent Sector, which represents 500 nonprofit groups.

Ms. Aviv argues the estate tax moderates the growing gap between rich and poor. The revenues of the tax can help provide more opportunity for those not inheriting great wealth, she says.

"That is a moral argument ... a pretty strong one," she says.

Graetz notes that the American ideal is that people should start out in life from a relatively even position and face equality of opportunity. In that sense, the estate tax is the most progressive of taxes.

Today, the heirs of less than 1 in 100 estates pay any estate tax at all, since $1.5 million per individual and $3 million per couple of any inheritance is currently exempt. The effective rate in 2003 averaged about 19 percent of the estate, and less than that by now.

Most Americans disapprove of a hereditary aristocracy. But Americans are also enormously optimistic, with many believing that they will reach the top 1 percent in income during their lives, surveys show.