Next Time, Fix Estate Tax Defects

President Clinton’s veto of a bill repealing the estate tax faces an override vote in the House today, but the cause is lost. In the Senate, repeal passed by only 59 votes, well short of the 67 needed to nullify a veto, and there’s no indication that repeal has gained any new supporters. That will leave in place a law that dates from Woodrow Wilson’s presidency nearly 85 years ago and whose antecedents stretch back into the late 18th century. It’s a necessary law but also one that changing economic times have left in need of modification rather than elimination.

Only about 2% of American families are affected by the estate tax. Current law allows estates of any size to be bequeathed tax-free to surviving spouses. For others, taxes are imposed only when the net worth of an estate exceeds $675,000, an exclusion that is scheduled to increase in steps to $1 million in 2006. With planning, married couples can exclude $1.35 million this year, rising to $2 million in 2006. In the case of family farms and businesses in whose operations heirs have been actively involved, the current exclusion is $1.3 million. That figure is too low, and Democrats say they are ready to join Republicans in raising it.

Clinton’s veto was warranted because the Republican-backed repeal measure went far beyond giving help to small farms and businesses. More than half of its benefits would have gone to estates involving no more than 3,000 families. The proposed 10-year phaseout would have cost $105 billion. In the decade after that, the cost would have ballooned to $750 billion. A relatively few already wealthy families would have enjoyed an enormous windfall. It would also have sharply reduced the cumulative projected budget surplus that figures so prominently in this year’s presidential campaign.

It’s wrong to force family farms or businesses to be broken up so that their inheritors can afford to pay estate taxes. But most Americans are also uncomfortable with the prospect of concentrating an even greater share of the wealth in the hands of a relatively few families, the top 1% of which already control 38% of the nation’s riches.

With bipartisan cooperation, moderate changes in the estate tax law can and should be made. Scheduled per-person increases in tax exemptions ought to be accelerated, and exemptions for small farms and businesses should be raised. These targeted changes are fair and fiscally responsible. The bill that Clinton vetoed was neither.