On April 13, the U.S. House of Representatives undertook its annual drill of voting to permanently abolish the federal estate tax, our only tax on inherited wealth. In 2003, the House passed identical legislation. Last time, Congress' projected 10-year cost of repeal was $162 billion; now, it's a cool $290 billion.
The lopsided vote for repeal, with 42 Democrats joining a unified gop, might suggest that the sun is setting on the estate tax. Anti-tax maestro Grover Norquist characterized it as “flopping around like that stupid fish in the boat.” “It's over, fish,” Norquist declared in one interview. “You're done!”
But an obituary (or fish fry) is premature. Thanks to gridlock in the Senate and mounting deficit concerns, pressure is building for reform, not elimination, of the tax. This pushback is coming from budget hawks, officials in states that continue to tax inherited wealth, and progressive organizing. Public opinion is shifting, as budget cuts begin to trickle down into local communities and school districts.
Under the federal tax cuts of 2001, the estate tax is phased out between now and 2010, with the wealth exemptions increasing from $1.5 million to $3.5 million for individuals, double for married couples. But without congressional action, the 2001 tax law will revert back to its pre-2001 provisions, a 55-percent rate and a $1 million individual wealth exemption.
The pressure to abolish the estate tax comes from anti-tax groups like Norquist's Americans for Tax Reform, the National Federation of Independent Businesses, newspaper owners, and front organizations funded by America's richest clans, including the Mars candy, Gallo wine, and Wal-Mart families. America's wealthiest family channeled political contributions from Walton Enterprises and retained lobbying powerhouse Patton Boggs to advocate for the family's interests.
But at a time of glaring budget deficits, Republican moderates like Senators George Voinovich and Olympia Snowe, who have supported repeal in the past, are unlikely to back complete abolition now. In response to their own dire budget situations, 18 states and the District of Columbia have voted to retain state-level estate taxes. In Washington state, a lively coalition of children's advocates and progressive Microsoft millionaires successfully lobbied the statehouse in Olympia to levy a new tax on estates over $2 million. This effort had the support of newly elected Governor Christine Gregoire.
The Iraq War, moreover, dramatically highlights the grotesque inequality of sacrifice, with families of GIs having to raise money for Kevlar armor. “During the Civil War, rich people could buy their way out of the draft,” said Charlie Richardson, co-founder of Military Families Speak Out. “Now the wealthy don't have to pay anything to avoid military service -- and they get big tax cuts on top.” Likewise, Senator John McCain has pointed out that our country has never given tax cuts to the wealthy during a time of war.
Rifts are also growing within the repeal coalition. The Small Business Council of America is challenging the hardcore repeal position of the National Federation of Independent Businesses. The council joins the 250,000-member National Farmers Union, which has become more outspoken in its opposition to repeal, even as President Bush insists that “killing the death tax” will “save the family farm.”
In their new book about estate-tax politics, Death by a Thousand Cuts, Yale professors Michael Graetz and Ian Shapiro describe how opponents of repeal were caught flat-footed as repeal forces got a 10-year head start framing the issue as an immoral “death tax.” They describe how repeal advocates successfully characterized the estate tax as a tax on the “working rich,” hosting family farmers and business owners to testify before Congress, even though many weren't rich enough to ever owe any tax at all.
Graetz and Shapiro's advice to opponents of repeal: Refocus the fight as a question about the immorality of unlimited and undeserved inheritances. “Call it the ‘Paris Hilton Benefit Act,'” suggested Graetz. Representative Earl Pomeroy, Democrat of North Dakota and lead sponsor of the House reform proposal, suggests linking the revenue from the estate tax to the long-term stabilization of Social Security.
There's strong support in the Senate for maintaining some form of estate tax. The coming debate will be over what constitutes “responsible reform.” Here's one formula: By raising exemptions to $2 million for individuals and $4 million for a couple, we could preserve almost 68 percent of the revenue, according to the Center on Budget and Policy Priorities. A more progressive rate structure, with lower rates on estates under $5 million and higher rates on estates over $20 million, would raise comparable revenue to the existing law.
A progressive reform could achieve one of the inheritance tax's original goals from its 1916 origins in the Progressive Era: to raise revenue from those most able to pay and break up swollen concentrations of wealth and power that threaten our democracy. Without a progressive inheritance tax, our own grandchildren will be working to earn dividends for the Walton grandchildren for many years to come.
Watch out Grover -- that fish might just flop back in the water.
Chuck Collins is the co-founder and associate director of United for a Fair Economy and the co-founder of Responsible Wealth, which recenctly advocated for estate-tax reform. He is the co-author, with Bill Gates Sr., of Wealth and Our Commonwealth: Why America Should Tax Accumulated Fortunes.
