Published on Tuesday, March 27, 2001 in the Wall Street Journal

Repeal of Estate Tax Would Cost More Than Previous Estimates

By JOHN D. MCKINNON Staff Reporter of THE WALL STREET JOURNAL

WASHINGTON -- Repealing the estate tax would cost hundreds of billions of dollars more than any previous estimate, according to a study by Congress's bipartisan Joint Committee on Taxation, raising further uncertainty over already-embattled efforts to ease the tax.

The committee's report found that current proposals to repeal the estate and gift tax would open new loopholes for well-to-do people to avoid taxes that would help the estimated costs more than double, to as much as $662.2 billion over 10 years if repealed immediately. Opening such loopholes alone would cost $252 billion that hadn't been anticipated over that time, the study said.

The cost study was requested by Rep. Charles Rangel of New York, the ranking Democrat on the Ways and Means Committee. Last fall, it was Mr. Rangel who requested a study of the alternative minimum tax, which showed that adjusting the AMT to compensate for President Bush's overall $1.6 trillion tax-cut proposal would add about $200 billion to that plan's price tag.

The new study on estate taxes was released late Monday, and Democratic staffers said the analysis showed that estate-tax repeal of any sort would cost more than proponents bargained for. Without a gift tax, for instance, well-to-do people might be able to transfer securities, real estate or other income-producing assets to their teenage children, who would be taxed at a lower income-tax rate. Doing away with the estate and gift taxes, critics say, would open the door to many such shell games simply by making the initial move nontaxable.

Bush administration officials have sought to minimize that concern, saying privately that it is possible to fashion antiabuse rules that will take care of much of the problem. They say the danger of abuse is overblown, because relatively few people will be willing to take steps that amount to tax fraud.

Sen. Jon Kyl, the Arizona Republican who has proposed a similar type of repeal, issued a statement late Monday questioning the numbers. "It's hard for me to understand how any repeal of the death tax could be twice the amount that it collects in the first place," Mr. Kyl said.

A spokesman for a leading small-business group said his group would still push for repeal of some kind, despite the new cost estimate. "It's high," said Dan Blankenburg, manager of legislative affairs for the National Federation of Independent Business, of the new estimate. But "for NFIB members it's such an emotional issue."

Even if the repeal number is correct, it is still possible for Mr. Bush and congressional committees to shape a repeal bill that is much less expensive, by phasing in the repeal over a number of years. Mr. Bush's budget blueprint estimated the cost of his repeal at $266.6 billion, and officials have vowed to hold it to that cost. House leaders are expected to try to keep their bill at about $250 billion.

The $662.2 billion figure also is six times the estimate attached to the bill that Congress passed last year and that then-President Clinton vetoed. But that legislation didn't fully repeal the estate tax until 2010. In contrast, some current GOP proposals would repeal the estate tax immediately and replace it with greater capital-gains liability for people who inherit assets from larger estates. They would do so by repealing a provision in current law that forgives a donor's capital gains at death.

Given the new cost figures, it is likely that repeal sponsors will return to their previous phase-in approach when they mark up a repeal bill Wednesday in the House Ways and Means Committee.

But putting off the repeal for a number of years strengthens the arguments of many Democrats, and a few Republicans, who say that simply raising the basic exemption from the tax -- currently $675,000 -- and dropping the rate would be more effective, particularly for the small-business owners and farmers who are leading the charge for repeal.

The report also suggests that increasing capital-gains liability wouldn't significantly reduce the cost of repeal, despite proponents' hopes. A related concern among Democrats is the possibility that switching to higher capital-gains liability would lead many more people to use life insurance to avoid capital-gains taxes. That is because life-insurance proceeds aren't subject to income tax. An Orlando, Fla., estate-planning lawyer, Lauren Detzel, testified at a congressional hearing last week that life-insurance schemes could proliferate and lead to efforts to remove the tax exemption on life insurance. Democratic analysts also say many schemes to avoid capital-gains taxes would benefit the wealthy who own securities, but notpeople whose assets are tied up in real estate -- such as farmers.

Lawton M. Nease III of Atlanta, an insurance adviser and past president of the Association for Advanced Life Underwriting, a trade group, disagreed, saying people typically would have to borrow money against their assets to buy the insurance -- a "nonstarter" for most people. But he said that the industry would oppose any attempt to make life-insurance proceeds taxable.

Copyright 2001 The Wall Street Journal