NU Online News Service, March 11, 2004, 7:03 p.m. EST, Washington – Growing budget deficits may be softening support in Congress for permanent repeal of the federal estate tax.[@@]

Even some congressional advocates who have agreed on the need for repeal now are more interested in permanent reform, reform advocates say.

Chuck Collins, co-founder of Responsible Wealth, Boston, says many members of Congress are telling the pro-reform group that they are willing to accept reform. The next question, he says, is what kind of reform.

Bob Plybon, president of the Association for Advanced Life Underwriting, Falls Church, Va., says the AALU and groups like Responsible Wealth have dedicated considerable effort to promoting the merits of estate tax reform.

“It appears that estate tax reform is making some headway in conjunction with large current and future projected federal budget deficits,” Plybon says.

Jack Dolan, a representative of the American Council of Life Insurers, Washington, agrees.

“It appears that increasing concern about the budget and federal deficits is driving those who support repeal to start thinking about permanent reform,” he says.

Indeed, Plybon notes that Senate Budget Committee Chairman Don Nickles, R-Okla., a supporter of repeal, has reportedly floated an estate tax reform proposal.

The Nickles proposal reportedly would increase the estate tax exemption to $3.5 million for individuals and $7 million for married couples. In addition, it would gradually reduce the estate tax rate to 15% to 20%, the same as for capital gains.

Similarly, Senate Finance Committee Chairman Charles Grassley, R-Iowa, has reportedly discussed an exemption of $5 million for individuals.

The current exemption is $1.5 million for individuals and $3 million for couples.

Plybon says these proposals are not consistent with the level of reform that AALU believes is affordable and sustainable. He says an individual exemption of $2.5 million would shield more than 99% of Americans from estate tax liability.

“Still,” he says, “AALU sees recent developments as signs of progress by perhaps beginning to move the debate from estate tax reform versus estate tax repeal to what level of estate tax reform is affordable.”

In addition, an attempt by Nickles to accelerate the current phase-out of the estate tax appears to have been sidetracked.

Currently, a provision of the Economic Growth and Tax Relief Reconciliation Act of 2001 requires that the federal estate tax be phased out in 2010 for one year. Then, the estate tax will return as it existed before the 2001 bill was enacted because of a sunset provision in that legislation.

In the Budget Committee’s fiscal year 2005 reconciliation legislation, the phase-out would be accelerated to 2009 and thus be in effect for 2 years.

However, the Senate may have sidetracked that effort when it approved a budget rule that requires any tax cuts to be offset by new revenues unless the cut garners 60 votes. The acceleration of the phase-out was scored as costing $3 billion. Thus, supporters of accelerating the phase out would have to find $3 billion elsewhere to pay for it or find 60 votes.

Former Federal Reserve Board Chairman Paul Volcker has criticized efforts to repeal the estate tax. He spoke at a press briefing sponsored by Responsible Wealth.

The estate tax, he says, must be considered in the context of all the other taxes, especially considering the current budget situation.

If the estate tax is repealed, he asks, what will replace it as a revenue source?

“Do we like other taxes better?” he asks.

Volcker notes that the estate tax has been in effect for more than 100 years. He says he does not remember a time it has come under this type of challenge.

Volcker adds that the current uncertainty surrounding the estate tax has made estate planning extremely frustrating.

The situation is “intolerably ridiculous,” Volcker says.

William Gates Sr., co-chairman of the Bill and Melinda Gates Foundation, says there now is a legislative stalemate on the estate tax. While the proponents of repeal do not have sufficient votes to prevail, he says, neither do the proponents of reform.

The pressure of deficits may be changing the atmosphere, Gates says.