July 26, 2006

Estate Tax Repeal: The Kitchen-Sink Strategy

Yet another loss for proponents of estate tax repeal this week, as Senate Majority Leader Bill Frist has announced he has given up trying to shoehorn estate tax language into a pension reform bill. To hear Senate Democrats tell it, the GOP has basically been holding needed pension reforms hostage to their agenda for high-end tax cuts.

Of course, one man's logroll is another man's unprincipled bribe, but GOP leaders have thrown everything but the kitchen sink at Democrats in an effort to find some way to buy off estate tax opponents. It's worth reflecting briefly on the tricks the Congressional leadership has pulled so far to try to ram through a provision the public simply doesn't support.

Before the pension linkage, House lawmakers attached estate tax cuts to an unprincipled tax giveaway for profitable timber companies in a naked effort to court pro-estate-tax Senate Democrats from timber states (read: Washington State). CTJ has a good summary of why this was a reprehensible idea here.

Now that the pension linkage has failed, which star will the estate tax wagon get hitched to next? Try "extenders," a package of expired temporary tax breaks that Congress routinely extends for one or two years at a time but has been unable to push through this year.

The most notorious element of the extenders package is the Research and Experimentation Tax Credit; CTJ's overview of what's wrong with the R&E credit can be found here. But the bigger threat, from the perspective of those who think estate tax repeal should be debated on the merits, is a proposal to extend a temporary federal income tax itemized deduction for sales taxes. This optional deduction, first enacted for tax years 2004 and 2005, expired on January 1 of this year. Like the timber tax break idea, this marriage of convenience between estate tax repeal and the sales tax deduction is aimed right at the two Washington State Senate Democrats, Cantwell and Murray, who have so far opposed estate tax repeal.

And this one might be harder for them to say no to: the sales tax deduction was enacted to benefit wealthy itemizers living in the nine states (including Washington) that don't have a broad-based income tax. Upper-income taxpayers in these states don't have a state income tax to deduct and therefore find itemizing less useful than residents of other states. The Center on Budget and Policy Priorities has a good explanation of why this is a problematic tax reform here.

Most of the extenders enjoy more widespread support than the failed timber-tax giveaway. So there's a very real danger that lawmakers who oppose complete repeal of the estate tax will fall in line with the GOP leadership when the estate tax legislation is combined with extenders. Let your lawmaker know that this important source of tax fairness should be evaluated on its merits!


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