Drive to Kill Estate Taxes Loses Steam

WASHINGTON — Efforts in Congress to abolish the estate tax are facing new hurdles, slowing momentum for a tax cut that was a centerpiece issue among Republican lawmakers last year.

With President Bush now selling his $1.6-trillion tax cut plan as a way to stimulate the economy, repealing the estate tax is expected to take a back seat to cutting income tax rates and other proposals more likely to have an immediate economic effect.

The drive to end estate taxes also is facing new sources of opposition, in some cases from surprising quarters.

Critics include a top Bush advisor, John J. DiIulio Jr., named last month to head the White House office charged with making it easier for religious and charitable groups to use federal funds to provide social services.

And a group of wealthy Americans, including the father of Microsoft Corp. Chairman Bill Gates, are mounting a campaign to keep Congress from repealing the estate tax because, they argue, it would increase income inequality and hurt charities that depend heavily on bequests.

There remains considerable bipartisan support in Congress for substantially cutting the estate tax. But the push for full repeal has seemed to lose its unstoppable quality in the face of competition from a panoply of other tax-cutting proposals.

“I would like to see the estate tax repealed,” said Rep. E. Clay Shaw Jr. (R-Fla.), a senior member of the House Ways and Means Committee. “But it’s going to have to compete with some of these other [tax cut] items.”

Dan Maffei, spokesman for Democratic members of Ways and Means, said: “The estate tax repeal has gone from being the engine of the big Republican tax cut to being the caboose.”

Estate tax critics are on their guard, urging Bush to make good on his campaign promise to eliminate--not just cut--what they term the “death tax.”

“I don’t want to see death tax repeal at the end of the line, competing with capital-gains tax cuts,” said Rep. Jennifer Dunn (R-Wash.). “I’m counting on the White House to stay strong on this.”

Dunn is the author of a repeal bill that has more than 200 cosponors.

The controversial tax, long considered a pillar of the progressive tax structure, applies to only about 2% of all estates. The tax does not apply to the first $675,000 of an estate--an exemption scheduled to rise to $1 million by 2006.

Although the levy affects relatively few taxpayers, support for its abolition has snowballed in recent years, in part because repeal advocates spotlighted its effect on two politically powerful constituencies: farmers and small businesses. The tax’s foes argue that the levy is so high that heirs often have to liquidate family farms and businesses to pay it.

The repeal also was pitched as especially beneficial to increasing numbers of Californians, given the hike in estate values because of surging home prices and the explosion of high-tech jobs that offer high pay and stock options.

A repeal measure easily passed both houses of Congress last year, winning virtually unanimous Republican support and the backing of 65 Democrats in the House and nine in the Senate. President Clinton vetoed the bill.

But the hopes of repeal advocates seemed to brighten with Bush’s election. Phasing out the estate tax has been part of his proposal to trim taxes by $1.6 trillion over a decade since he unveiled the plan during the 2000 campaign. As recently as December, it appeared that the repeal effort might be the first piece of the Bush tax plan to come before the House. Some GOP congressional leaders suggested that the tax cut debate should begin with its most politically popular pieces.

But since then, concern about the economy has shifted the rationale for cutting taxes to focus on stimulating economic growth. As a result, House Republican leaders plan to move as early as March on a bill that centers on reducing income tax rates and other provisions of the Bush plan that they argue would get cash into taxpayers’ hands quickly. The estate tax would not fit into such a bill, Republicans say, because it has comparatively little immediate effect on the economy.

Treasury Secretary Paul H. O’Neill has indicated administration support for this strategy. At a Ways and Means Committee hearing earlier this week, he identified the income tax rate cuts and a doubling of the tax credit for families with children as the two elements he would want included in an early bill to stimulate the economy.

If that happens, the estate tax issue would not be addressed until later in the year, in the second phase of tax legislation, said Ways and Means Chairman William M. Thomas (R-Bakersfield).

This staggered approach has raised concerns among those who want to end the estate tax. “No doubt, it worries me,” said Dan Blankenburg, a lobbyist for the National Federation of Independent Businesses, a small-business group leading the charge for estate tax repeal. “Any time you see your bill move further down the pike, you get nervous.”

Meanwhile, critics of the repeal effort see the comments of DiIulio as giving them an ally in Bush’s inner circle. DiIulio, in a recent interview, warned that repealing the estate tax could undercut private contributions to charity.

“I don’t want to be the skunk at the picnic,” he said. “But no, I don’t think the estate tax should be eliminated; modified, maybe, but not eliminated.”

DiIulio was voicing a concern shared by many other advocates of charities who argue that significant contributions come from wealthy individuals seeking to reduce their exposure to the estate tax before they die.

“The charities of the country have a stake in the estate tax,” said William H. Gates Sr., one of more than 100 wealthy individuals who have banded together to oppose repealing the estate tax. “It’s part of the reason I think we should have an estate tax: It does encourage people to give to places like universities.”

Gates Sr., the father of Microsoft’s founder, belongs to a group called Responsible Wealth, which works to reduce income inequality. The group is placing ads in newspapers that call on Congress to preserve the estate tax.

“Repealing the estate tax would enrich the heirs of America’s millionaires and billionaires while hurting families who struggle to make ends meet,” the group’s ad says.

It is signed by more than 120 individuals including the senior Gates, Ben Cohen (founder of Ben & Jerry’s ice cream) and other wealthy philanthropists such as David Rockefeller Jr., Steven C. Rockefeller and George Soros--many of whom are affiliated with foundations that rely heavily on charitable donations.

The ad campaign infuriates repeal proponents, who say that its signers are people so wealthy that the tax is no burden--or that they can pay for lawyers to find ways to evade it. “It’s chump change for billionaires,” Blankenburg said. “I don’t know why they think it is necessary to hold everyone else hostage to the death tax when they simply avoid it.”

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