When the procedural vote failed in the Senate that would have allowed a vote on full repeal of the estate tax (see HNR from June 16) and negotiations between Senate Republicans and Democrats ended, Majority Leader Frist (R-TN) asked the House to produce legislation.  Rep. Thomas (R-CA), Chairman of the Ways and Means Committee, produced a bill, H.R. 5638, that would dramatically scale back the estate tax.  On June 22, the House approved a deep and permanent cut in the estate tax by a vote of 269—156.  Most Republicans and 43 Democrats favored the bill.
The legislation exempts estates worth as much as $5 million ($10 million for couples) from paying any federal estate tax.  The rate set for estates valued between $5 million and $25 million would be 15 percent and for those over $25 million 30 percent.  However, it is important to note that because the rate is only applied to the remainder of the estate after subtracting the exempted amount and after applying other tax breaks, the actual tax liability would average 9 and 12 percent respectively for estates between $5 million and $25 million and for those over $25 million.  This is significantly less than the federal payroll and income tax rates workers typically pay on their wages.  Further, the House-passed bill indexes the exemption levels for inflation.

The House bill also contains a special capital gains tax break for timber companies designed to gain the support of the Democratic senators from Washington, a major timber-producing state.  The special capital gains tax break they would receive means that certain profitable timber companies would likely pay no federal income tax.  This provision would expire at the end of 2008.  A revenue-raising provision in the bill no longer permits estates paying state inheritance tax to deduct those tax payments from their federal payment.  This particularly affects states like Washington that have high state estate tax rates.

If enacted this legislation would result in a loss of up to $800 billion during the first ten-year period in which the cut would be fully in effect.  Today no estates under $2 million ($4 million per couple) pay any federal estate tax, and in 2009, no estates under $3.5 million ($7 million per couple) will pay the tax.  In 2009, only 3 out of every 1,000 estates would owe any estate tax.  Gutting the estate tax would create enormous pressure to cut government services.  Last year, Congress cut Medicaid and student loans, seemingly concerned about the deficit.  Now, there are House proposals to cut child welfare, maternal and child health, job training, Head Start, and K-12 education for poor children below 2005 spending levels.

Last week the Senate was scheduled to vote on H.R. 5638 but the bill was withdrawn because Sen. Frist (R-TN) did not have the 60 votes necessary to vote on the bill.  Just before the July 4th recess, Sen. Landrieu (D-LA) who is considered a key Democratic swing vote, introduced a bill with the same exemption levels as in the House bill but which imposes a higher 35 percent tax rate on estates that exceed the exemption levels.  While analyses of the Landrieu proposal were not ready at press time, it is anticipated that it will have a substantial cost.

Senate Republican leaders on the estate tax hope to have a floor vote before the August recess.

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