Estate tax debate heats up in U.S. tax fight

WASHINGTON, July 26 Fri Jul 27, 2012 2:59am IST

WASHINGTON, July 26 (Reuters) - The partisan fight in the U.S. Congress over the "death tax" - the Republicans' moniker for federal taxes levied on estates passed on by individuals to their heirs - is back.

Debate is ramping up because the estate tax is part of the mass of tax cuts enacted under President George W. Bush in 2001 and 2003 that are now set to expire at the end of 2012.

Senate Republicans are gleefully exploiting division among Democrats on the issue, which muddies the Democrats' election-year message of asking the wealthy to pay their "fair share."

If Congress fails to act, the estate tax will rise dramatically to 55 percent from 35 percent, after excluding the first $1 million of value. That bothers many lawmakers, including Democrats from ranching and farm states.

"It is one of the hardest issues for Democrats" and for Democratic Majority Leader Harry Reid, said Jim Manley, a former top Reid adviser. "There is a minority of Democrats, some from rural or swing states, who have been very vocal in raising their objections to raising" the estate tax.

Republicans spotted a political opening on this issue when Senate Democrats omitted the estate tax from legislation to renew the Bush tax cuts for those earning less than $250,000.

That bill passed the Senate on Wednesday, but it was not expected to go any further. The Republican-led House will likely vote next week to extend all of the Bush tax cuts, including those on income above $250,000.

PARSING THE NUMBERS

Republican debate over the Senate Democrats' tax proposal on Wednesday was dominated by talk of the estate tax.

"Tens of thousands of small and mid-sized family businesses across the country will be broken up and handed over to the government," under the Democrats' plan, Senator Republican leader Mitch McConnell said in floor debate.

That is not quite true, according to data distributed by Republicans that was compiled by the non-partisan congressional Joint Committee on Taxation.

McConnell was referring to 55,200 estates that would face the tax if no action is taken this year, according to JCT.

The senator's spokesman said: "It is unquestionable that the JCT document shows this tax increase would affect tens of thousands of individuals who earned their wealth in business of some form of another, be it a small or mid-sized or undoubtedly in some cases large businesses."

Under current law, the first $5 million of an estate, or twice that if it involves a married couple, can pass to heirs tax-free. Anything above that is taxed at 35 percent.

Most Democrats agree the tax should not snap back to the 55 percent level. Obama backs a 45 percent tax on estates after a $3.5 million exemption. Some Democrats want a steeper exemption.

To get around their division, the Democrats decided to wait until year end to tackle the issue. "This is an issue that we'll have to put over to a later time, and I think rightfully so," Reid said.

Of the estates facing the tax if Congress fails to act, 2,700 are described as small business, generally non-corporate estates with value of less than $10 million, according to JCT.

Under the proposal backed by Obama, a total of 7,200 estates would be taxable in 2013, according to JCT, with 400 meeting the standard for small business. (Additional reporting by Donna Smith; Editing by Steve Orlofsky)