Charities harden opposition to an estate-tax repeal

An unusual coalition of charities, churches, and labor groups may frustrate President Bush's plan to make permanent his major 2001 tax cuts - especially the full elimination of the estate tax that's scheduled for 2010.

"It would be a long-term disaster for this country to repeal that tax," says Gary Bass, chairman of Americans for a Fair Estate Tax, a Washington lobbying group.

Members of AFET include such influential organizations as the American Arts Alliance, American Association of University Women, the AFL-CIO, and an evangelical group. Altogether, several hundred nonprofits of all stripes are represented, directly or indirectly, by AFET.

Despite Republican success in congressional elections, Mr. Bass figures the administration will be one to three votes short of the filibuster-proof 60 votes needed in the Senate for quick passage of a bill making the entire tax cut permanent.

"I am optimistic that we will be able, when cooler heads come to the table, to come up with a more responsible approach to the estate tax," says Bass.

The administration reportedly figures it can round up 60 votes by including in a bill a wide range of further tax cuts for individuals, including middle- and lower-income taxpayers, and business.

The objections of AFET groups to repeal of the estate tax are threefold.

One is that the Bush tax cut already deprives the federal government of substantial estate-tax revenues - $206 billion between 2002 and 2012, according to a study by the Joint Economic Committee of Congress. It will cost more - at least $740 billion - in the next decade after full repeal. The result might well be cuts in various social and other programs, or at least, a limit on program expansions. Some voters welcome such revenue losses as a way of shrinking government.

But this bothers, for instance, trade- union groups, including those representing state and municipal workers.

In fiscal year 2002, Washington got about $27.5 billion from estate and gift taxes. Many states got billions, too. With the estate tax fading away in steps, its revenues will remain flat this decade, despite the increased wealth of seniors.

A second problem is that the estate tax's end would take away an incentive for people to leave money to various non-profits. They could leave all their wealth to their children without Uncle Sam taking any bite at all. It is decidedly a pocket-book issue for AFET members.

Colleges, though aware of the impact of estate-tax repeal for their endowments, are generally reluctant to take a stand on the issue for fear of offending well-to-do donors. They also may hope that if Washington doesn't take its chunk of an estate, beneficiaries will have more money to donate to schools.

A paper by David Joulfaian, a Treasury Department tax analyst, finds that giving by the wealthy would fall about 12 percent. The Independent Sector, which serves nonprofit groups, sees a drop in charitable bequests of at least $1.5 billion to $5 billion.

Though less than 2 percent of estates are big enough to actually owe estate taxes, the number would increase if many of the prosperous didn't set aside money for hundreds of charities.

A third element of the issue is social. Some AFET groups, such as the Evangelical Lutheran Church in America, figure abolition of the estate tax would weaken further the modest inter-generational restraint on the buildup of a plutocracy in the United States.

One goal in founding the US, in addition to escaping British taxes entirely, was to avoid the establishment of a wealthy aristocracy such as that prevailing in Europe at the time of the American revolution, Bass says.

This year, any amount can be left to spouses tax-free and as much as $1 million to offspring or others without being taxed. The top tax rate was reduced from 55 to 50 percent.

In 2009, under the Bush tax cut, the exemption will be raised to $3.5 million and in 2007, the top tax rate will fall to 45 percent. After its abolition, the estate tax is scheduled to return to a $1 million exemption and a 55 percent top rate in 2011.

The AFET claims some credit for blocking legislation sponsored by Sen. Phil Gramm (R) of Texas in an earlier effort to make the estate-tax repeal permanent. His bill got 54 votes in a June vote, not filibuster-proof.

The Texas Republican held that the "death" tax would "rise out of the grave in 2011 and start destroying family businesses, family farms, and family dreams." Repeal has the support of many business organizations, farm groups, and nonchain newspaper publishers.

But to Bass, those concerns are "foolishness." Far fewer than 1 percent of family farmers face a tax on their estates. It is "not a significant issue" for small business.

Nonetheless, the estate tax has become "an iconic issue" for conservatives, Bass says. They intensely dislike the tax. So he suggests reform rather than repeal, letting the exemption amount rise above $1 million, maybe to $3 million, and thus clearly exempt small business and farms.

Next year's Republican Senate leadership could reduce the votes needed in the Senate to pass a bill making the tax cuts permanent to a simple majority by using a complex "reconciliation" budget procedure. But the process would take at least six months. The measure must also include a "pay-as-you-go" requirement so that any revenues lost from the repeal would be offset by tax increases or spending cuts. That would not be easy.

"This is big potatoes," says Bass.

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