Effort to Repeal Estate Tax Said to Be Faltering

WASHINGTON â€”  A decade-long drive to permanently repeal the estate tax is about to come to a head, but proponents are finding it surprisingly difficult to get their political football into the end zone.

The repeal proposal may be an indirect casualty of Hurricane Katrina, which forced Senate leaders to postpone a vote on the plan in September, when hopes it would pass were high.

Now, with the Senate poised to vote as early as this week, even some of the most ardent supporters of estate tax repeal predict they will come up short. Some of them are pushing an alternative that would reduce but not eliminate the tax.

Sen. Jon Kyl (R-Ariz.), a longtime estate tax critic, is urging a tactical retreat because he believes that support for permanent repeal is eroding at a time of big budget deficits. And he fears that the political climate would be even less hospitable after the 2006 elections if Democrats win control of either the House or the Senate.

“Our political position could be dramatically negatively impacted this fall and after the next presidential election,� Kyl said recently.

A key question is whether Kyl or others can assemble a bipartisan majority for an alternative that would sharply cut the estate tax but stop short of full repeal.

Either way, the upcoming Senate debate is a pivotal moment for a coalition of wealthy families, small-business lobbyists and farm groups that has already accomplished a remarkable thing over the last decade: making a national political issue out of repealing a tax that applies to less than 1% of all taxpayers, including some of the richest people in the U.S.

Many Republicans believed that coalition was on the brink of prevailing in September before Senate leaders postponed action to focus on responding to Hurricane Katrina -- and to avoid the politically damaging image of giving tax breaks to the wealthy while hurricane victims faced financial ruin.

Since then, even some Republicans acknowledge, the momentum for estate tax repeal has been undercut as spending for the Iraq war and Katrina recovery has climbed. Several senators who once backed the repeal now say they are less inclined to, citing concern about its cost.

Those swing senators are now targets of an intense lobbying war. Advocates on both sides of the issue bombarded their home states with television and radio ads during last week’s Memorial Day recess. Each side is deploying rich and famous people to champion its cause. Competing analyses and cost estimates are flying thick and fast.

The ferocity of the fight is surprising in light of the fact that only a tiny slice of the population is affected by the tax, which applies to inheritances in excess of $2 million. Only 12,600 estates will be taxed this year, according to the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution.

“How could a tax that’s been around since 1916 that affects such a small handful of wealthy Americans be converted into such a populist issue?� asked Michael J. Graetz, a professor at Yale Law School and coauthor of a book -- “Death by a Thousand Cuts� -- addressing that question. “It is the genius of the proponents of repeal. They used all the modern tools available to political movements.�

Graetz gives the proponents credit for conducting a well-orchestrated, well-financed campaign that began in the early 1990s, when Republicans and other critics of the estate tax began calling it the “death tax� to make its elimination more politically palatable. A nonprofit group, the American Family Business Institute, was set up in 1992 for the sole purpose of advancing the cause.

A recent report by Public Citizen, a liberal watchdog group, identified 18 wealthy families who contributed to organizations promoting repeal of the estate tax. It calculated that at least 15 of those families’ businesses paid $27 million since 1998 for lobbyists to promote repeal of the estate tax.

Dick Patten, executive director of the American Family Business Institute, disputed the report, saying that his group’s success was due less to wealthy people trying to reduce their tax bill than to businessmen and farmers who are worried that the estate tax would make it hard for them to pass on their businesses to heirs.

Supporters of the estate tax have also found allies among the well-heeled, including William H. Gates Sr. -- the wealthy father of the even-wealthier Bill Gates, founder of Microsoft -- who has been in the vanguard of the effort to block repeal. Proponents of the tax also have the support of the life insurance industry, which stands to lose business because it sells policies designed to reduce the impact of the tax on inherited wealth.

Estate tax backers acknowledge they were outflanked in the early years of the debate.

“The good guys were asleep for a decade,� said Steve Richetti, a lobbyist for the Assn. for Advanced Life Underwriting, which opposes repeal. “No one was fighting against it.�

Richetti and others last year tried to remedy that by bringing repeal opponents together in a group called the Coalition for America’s Priorities.

As a populist issue, support for the estate tax should be a slam-dunk because such a small number of estates pay the tax. Still, it brings in a lot of revenue because estates over $2 million are taxed up to 46%. The Congressional Budget Office estimates that estate tax revenue will come to $28 billion in 2006.

But those who want to repeal the tax say it is an unfair levy on people who have been working hard and saving successfully over a lifetime. They have found politically powerful allies among small businessmen and farmers who say they fear their heirs will have to liquidate enterprises they inherit in order to pay the steep tax.

Opponents of repeal say the deficit-ridden federal government cannot afford to repeal a tax that benefits only the wealthy. The Center on Budget and Policy Priorities estimates that in the first 10 years after a repeal, the government would lose $776 billion in revenue.

The issue is coming to a head now because, in President Bush’s 2001 tax cut, Congress voted to gradually reduce the inheritance tax -- which was then 55% on the amount in excess of $1 million -- and to repeal it in 2010. But because the entire tax law will expire after 2010, under a provision to hold down its price, the 55% estate tax is scheduled to be reinstated in 2011.

The House since then has voted repeatedly to repeal the tax permanently, but the measure has been blocked by a Democratic filibuster in the Senate. It takes 60 votes to cut off a filibuster.

In recent years, the size of the federal deficit has prompted second thoughts among some who supported estate tax repeal in the past, including Sens. George V. Voinovich (R-Ohio), Ron Wyden (D-Ore.) and Evan Bayh (D-Ind.).

Lobbyists seeking repeal say they are within a vote or two of getting the 60 votes they need. But Kyl and other allies are not so sure.

“We do not have the votes,� Kyl told repeal supporters recently. “I’m trying to come up with [an alternative] because of the fact that time is limited here. Our position is eroding.�

If the result is deadlock in the Senate, it will push the issue off for at least another year.