The administration has been using the release of the mid-session revenue and the report of a lower deficit as an excuse to squawk about their excessive tax cuts causing economic growth. Simply because deficit projections were lowered to $333 instead of a whopping $427 billion for FY 2005 does not mean that Bush's tax policies have proven to be pro-growth. Instead, much of the reason for the deficit reduction lies in the fact that revenue levels are up in 2005, mainly when it comes to corporate taxation. A number of particular tax laws has led to an increase in tax collections which will prove to be more temporary, according to many analysts, than the administration is currently admitting. The expiration of a specific business tax cut along with strong capital gains returns and a concentration in nonwitheld taxes led to a 2005 surge in revenue. The surge remember, is still lower than levels of revenue which were predicted for 2005 back in 2002. To read more on how the 2005 revenue collections have affected predicted deficits, see this CBPP report.

Sen. Jon Kyl (R-AZ) said yesterday that he continues to hold conversations with Finance Committee ranking member Max Baucus (D-MT) regarding specific parameters of possible estate tax reform. According to reports, it is likely the Senate will vote on a compromise before the end of August. While many senate Democrats feel pressured to negotiate on the estate tax before the mid-term elections, the specifics that Kyl is discussing could severely gut the tax. Kyl has made it known that he is in favor of an $8 million exemption level, and has also expressed support for instating a ten-year pay period. Concerning the tax rate, Kyl has said it would be best if it were tied to the capital gains rate (currently 15 percent although it is slated to revert to 20 percent in 2008). The Urban-Brookings Tax Policy Center estimates that this exemption, coupled with the low tax rate, would reduce estate tax revenue by 93 percent overall. In that sense, the reform would be little better than outright repeal. Not only would a lower the tax rate significantly reduce the amount of revenue brought in by the estate tax, but it should also be viewed as a possible back-door attempt to do away with the estate tax altogether. If the capital gains tax rate were ever brought down to zero, the estate tax would effectively be eliminated. To read more on this, see the Watcher article, "Rhetoric Heats Up On Estate Tax as Political Reality Pushes Compromise," as well as the CBPP report, "Kyl Estate Tax 'Compromise' Proposal Extremely Costly; True Cost Likely to be Masked."

Sunday's New York Times included an article discussing the findings of the estate tax report released by the CBO last friday. The article notes that the number of farms owing the estate tax when the owners die has fallen by 82 percent since 2000. The number has fallen to 300 farms. The estate tax raised an estimated $23.4 billion last year from the richest 1 percent of Americans. Responsible reform, as opposed to repeal, is necessary in order to ensure this continued source of much-needed revenue. For more information, also see this new Center on Budget and Policy Priorities analysis of the CBO report.

The Congressional Budget Office (CBO) released a report today called "Effects of the Federal Estate Tax on Farms and Small Businesses." The report, which was prepared at the request of Senate Finance Committee Ranking member Max Baucus (D-MT), looks at how family farms and small businesses are truly affected by the existence of an estate tax. Proponents of estate tax repeal often make the argument that the tax unfairly hurts family farms and small businesses. In reality, a number of exemptions for family farms and small businesses exist, which can serve to significantly lower the number of estate tax filers. This analysis, which uses data from 1999 and 2000, looked at the effects of freezing the estate tax exemption level at $1.5 million, $2 million, and $3.5 million. The report found that any of those expemtion levels, along with a 48 percent tax rate and a large Qualified Family-Owned Business Interest (QFOBI) would substantially reduce the number of small businesses and farmers affected by the tax. The estate tax needs to be reformed so that in 2011 (when it is scheduled to revert to it's pre-2001 form), family farms and small businesses are not unfairly burdened with the tax. However, as this report alludes to, repeal is not necessary in order to reduce the burden on family farms and small businesses. Deductions like QFOBI as well as raising the exemption level to one of the above-mentioned levels can work to do the accomplish the same end.