House Passes Estate Tax Repeal Bill, But Its Future Is Uncertain

JUNE 12, 2000 VOLUME 7, NUMBER 50

The big news in the elder law and estate planning field this week was the Friday passage (by the House of Representatives) of a bill to repeal the federal estate tax. The vote to repeal was lopsided, with a 279-136, with 65 Democrats joining the Republican majority. Does this mean that the estate tax will soon be history?

Despite the strong (and bipartisan) vote to repeal the estate tax, the issue is far from resolved. President Clinton has clearly indicated his intention to veto the current bill if it passes the Senate, characterizing the repeal as a Republican tax break for the very wealthy.

If Congress wants to override Clinton’s expected veto, it will need to muster 2/3 votes in both houses. Friday’s vote was just over 2/3 in favor of repeal, but there were 20 Representatives not voting. In a veto override vote, some of those voting in favor Friday might choose not to confront the President. In other words, even with Senate approval the repeal is still far from assured.

Cynical observers chalk the entire exercise up to election-year politics. With last week’s vote, the Republican majority (and the Republican presidential candidate) can campaign on a platform of attempted tax cuts. Democrats, equally disingenuous, can claim to be protecting the poor and middle class from Republican attempts to give special treatment to the very wealthy.

The estate tax has become a major campaign issue despite the fact that it directly affects only about 2% of estates—43,000 of the 2.3 million deaths in 1997 lead to payment of estate taxes. Indirect effects are somewhat more widespread, with many middle-class families spending at least some money on estate tax planning. Republicans point to another indirect cost—the sale of some family businesses forced by inability to pay the estate tax on the death of the family patriarch or matriarch.

The loss of tax revenue from repeal of the estate tax would be substantial. The Republican bill passed last week would cost over $100 billion during the ten-year phase-in period, and lost revenue after that would be about $50 billion each year. Republicans insist, however, that the federal government can forego that tax revenue and still offer a substantial additional tax cut from income and excise taxes.

Reports about the repeal of the estate tax usually overlook another issue: the current bill would restore an unpopular tax from an earlier era. Current income tax law exempts the gains in value of property received by inheritance. The House bill would impose a new capital gains tax on that lifetime growth in value. That tax would be limited to 20% (under current tax rates), and would only apply to total gains over $1.3 million for each decedent’s estate. The change, say some critics, would introduce new record-keeping requirements and planning complexities.

Politicians, lobbyists and pundits have lined up to debate the merits and drawbacks to the current estate tax system. Excellent arguments in favor of continuation of the tax can be found in an online article by the Center on Budget and Policy Priorities, and a compelling case against the estate tax is made (also online) by the Joint Economic Committee of Congress.

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