The House voted Thursday to cut taxes on inherited estates and relieve thousands of heirs from paying tax collectors during the next decade.
The vote, just a few months before an election with control of Congress at stake, saw majority Republicans temporarily setting aside their ambition to abolish the tax.
Instead, the House voted 269-156 to exempt many more estates from taxation and blunt the impact on still others. The compromise measure now goes to the Senate.
Congressional tax experts estimated that if the changes become law, only 5,100 estates would face taxation when the changes are fully in effect in the fiscal year beginning Oct. 1, 2011. The Internal Revenue Service levied taxes on more than 30,000 estates in 2004, the most recent figures available.
However, the bill also restores estate taxes in 2010, deleting what had been a one-year reprieve from them entirely under an earlier law.
The politics of the estate tax
President Bush and Republicans in Congress have long pressed to abolish the estate tax, arguing it is unfair to tax businesses and farms left to the next generation.
"Americans are being taxed almost every moment of their lives. My goodness, when they are dead, do we have to tax them again?" said House Majority Leader John Boehner, R-Ohio.
Democrats argued that it is more unfair to give millionaires a tax cut while denying thousands of poor workers a higher minimum wage.
"This is the ultimate values debate," said House Minority Leader Nancy Pelosi, D-Calif. "It is morally wrong to do this, especially when we are turning down, rejecting, an increase in the minimum wage."
Bush and Republicans in 2001 had succeeded in killing the estate tax for one year, 2010. But the tax would reappear at a rate of 55 percent in 2011, under Bush's initial tax cut package.
The House bill would replace that temporary law by reducing, but not eliminating, the estate tax. It responds to a plea for help from Senate GOP leaders, who discovered earlier this month they did not have enough votes to abolish the tax.
That forced lawmakers to talk compromise, but GOP tax writers, under pressure from the House's most conservative Republicans, said they wouldn't negotiate further than the offer made in the bill.
"This is not a first offer. It is the only offer," said House Ways and Means Committee Chairman Bill Thomas, R-Calif.
How it works
The reduction in the House bill would exempt from taxation $5 million of an individual's estate, and $10 million of a couple's. That exemption would increase automatically each year with inflation.
After the exemption, estates worth up to $25 million would be taxed at rates equal to those on capital gains, currently 15 percent but scheduled to rise to 20 percent in 2011. The remainder of any larger estates would be taxed at rates twice that of capital gains, or 30 percent at first and 40 percent when the scheduled capital gains tax increase takes effect.
The bill lets a surviving spouse take any unused portion of a deceased spouse's exemption, but it also eliminates the federal deduction for estate and inheritance taxes levied by states.
The Joint Committee on Taxation estimated the tax reductions amount to roughly $283 billion from 2006 to 2016.
Additional analysis, obtained by The Associated Press, shows the future cost in lost revenue to the government would increase to more than $300 billion if lawmakers keep the 15 percent capital gains rate in place in future years, instead of letting it increase to 20 percent in 2011.
The battle continue
Some business and farm groups favoring repeal of the tax said they could accept the compromise, but only as an interim step on the way to eliminating the tax.
The National Federation of Independent Business said it would do everything possible to see the bill enacted. "NFIB will continue to fight for full repeal of the death tax, but our members need guaranteed relief they can plan on right now," said executive vice president Dan Danner.
The House bill also contains a reduction in timber taxes, part of a strategy to pass the bill in the Senate by luring support from key Democrats.
Jim Manley, spokesman for Senate Minority Leader Harry Reid of Nevada, said the compromise doesn't go far enough for Democrats. "I'm hopeful that we have the votes necessary to stop this multibillion-dollar tax break for some of the wealthiest individuals in this country," he said.