The House voted last week to approve an estate tax "compromise" that is, in reality, backdoor repeal of the tax. The vote clears the way for another Senate vote on the estate tax, following the Senate's rejection of repeal earlier this month. On June 8, the Senate rejected a motion to proceed on debate for full repeal of the estate tax. Given the Senate was at least three votes short of proceeding with permanent repeal, Senate Majority Leader Bill Frist (R-TN) felt it was time to move on estate tax "reform." Since tax bills must come from the House, Frist asked GOP leaders there and House Ways and Means Chair Bill Thomas (R-CA) to move a "reform" bill in the House that could then be taken up in the Senate before the July 4 recess. Thomas flew into action, moving the Permanent Estate Tax Relief Act (H.R. 5638). The bill would increase the exemption level, under which no estate tax is paid, to $10 million for couples ($5 million for individuals). Estates valued between $5 million and $25 million would be taxed at the capital gains rate, currently 15 percent; estates worth more than $25 million would be taxed at double the capital gains rate or 30 percent. During debate over the bill, Thomas made it clear that this was not a bill on which the House was willing to negotiate in conference. Instead, he repeatedly said this bill must be passed by the Senate in the form that the House passes —a take-or-leave-it bill. This emphasis may have been necessary in order to garner the support of a number of House conservatives that initially did not want to vote on anything but permanent repeal. Even though this “reform” effort is nearly just as expensive as permanent repeal (total repeal costs around $1 trillion; this would cost about $823 billion), some conservatives found compromise to be a bitter pill to swallow. Conservative advocacy groups were split on whether to support reform over repeal, sending conflicting messages on the new strategy. They were particularly concerned with linking the estate tax rate to the capital gains rate, a rate that would go up if current tax cuts are not extended. Nonetheless, the Thomas bill passed handily in the House. Surprisingly, however, its final vote was nearly identical to the House vote on permanent repeal. In other words, this type of reform, which is repeal in all but name, did not change the political dynamic. Forty-three Democrats voted with all but two Republicans in the 269-156 vote. This was roughly the same vote as on permanent repeal in the House. Recognizing that this “reform” bill is less than a meaningful compromise, Thomas added a sweetener to the bill in hopes of garnering additional Senate votes. He added a timber tax break supported by the timber industry an important political force in Washington, Louisiana, and Arkansas -- key states in the Senate vote on the estate tax. The timber tax break would allow timber companies to subtract 60 percent of their tree-cutting income from tax. The provision, which would cost $940 million, would last two years and then sunset unless renewed. Citizen for Tax Justice developed a summary of the tax break and noted that a company with a healthy profit from its paper sales could avoid taxes all together. (http://www.ctj.org/pdf/timber0606.pdf) So now the action turns to the Senate, where Frist took procedural steps to bring the House bill up this week. Late this afternoon, however, Frist announced there would be no vote on the bill before the July 4 recess. A number of observers believe that the surprising development could only mean that Frist still lacks the 60 votes needed to proceed with debate. Sen. Ron Wyden (D-OR), who has shifted from supporting repeal of the estate tax to wanting reasonable reform, noted that a bill that comes in at three-quarters or 80 percent of the full cost of repeal will be a tough case to make. Wyden told reporters last week, "I get the sense, for swing senators, anything that is upwards of 50 percent of the cost is a great leap." Nonetheless, there is enormous pressure on a handful of Democratic senators to switch their votes, particular Maria Cantwell (WA), Patty Murray (WA), Mary Landrieu (LA), Mark Pryor (AR), and Ken Salazar (CO). At the same time, the compromise could lose some Republican votes, including Trent Lott (R-MS) and Jeff Sessions (R-AL), who have been outspokenly determined to see no less than full repeal. Sessions recently stated, "If a compromise does not really eliminate the confiscation that occurs then I'm not sure that I'm supportive of it. And some of the things I'm hearing probably are not sufficient to satisfy my thoughts." If Frist again fails to find his 60 votes, he can try to ram the House bill through the Senate by attaching it to important legislation as part of the conference report. The only way to stop it then would be to vote against the whole bill, including the important legislation. Cost of the Permanent Estate Tax Relief Act According to the congressional Joint Committee on Taxation, the total cost is roughly 80 percent of permanent repeal, depending on assumptions used:

• It costs $279 billion over the next 10 years.
• Between 2012 and 2021, the first full 10 years, it will cost $602 billion and another $160 billion for interest — a total of $762 billion
• If you assume the capital gains 15% tax rate is extended (it is currently scheduled to expire), then the 10-year cost is $823 billion.
Full repeal of the estate tax is around $1 trillion over the first full 10 year period.