Lawmakers Race to Extend Reduced Tax on Large Estates

Lawmakers are racing against the clock to prevent the estate tax from reverting to rates that opponents claim could cost small businesses and farmers millions of dollars.

The estate tax, known by opponents as the "death tax," is the hefty tax the federal government imposes on large personal wealth inherited when an estate holder dies. The tax is set to disappear next year, the last year of the 2001 Bush-era tax cuts, but then return in a big way in 2011.

Right now, the first $3.5 million of an estate is exempted and anything over that is taxed at 45 percent. If nothing is changed, the rate in 2011 returns to pre-Bush levels -- under which the first $1 million is exempted and anything over that is taxed at 55 percent.

Many lawmakers want to find a way to keep from going back to that, because they say it is potentially devastating to the families of any farmers and small business owners who leave behind estates larger than the threshold.

"There is strong pressure to do something before Dec. 31," said Alan Viard, a scholar with the conservative American Enterprise Institute.

Proponents of the tax note that it typically raises in excess of $20 billion every year and affects relatively few estates. In 2009, only about 5,500 estates will be subject to the tax, according to projections from the Tax Policy Center, a Washington think tank. That's 0.23 percent of all estates.

Acting before 2010 would deprive businesses of the savings they'd otherwise enjoy from the tax zeroing out next year, but it would save them from the larger tax in 2011 and beyond.

Pat Wolf, with the American Farm Bureau, said that farms large enough to support a family can "easily" pass the exemption threshold and that the high rate could force some to sell off their land.

"When there is death, estate taxes are owed -- the government wants their share in cash," Wolf said. "What happens is that the surviving family members, the children and grandchildren left behind, they have to sell part of their business to pay the tax. And when they do that, they destroy their business."

Steve Entin, president and executive director of the Institute for Research on the Economics of Taxation, said the situation is similar for small businesses.

"In a small business at normal rates of return, you can roughly double the business every generation, but then the government comes and takes half of it away from you. It knocks you back to where you started, and they do this generation after generation," he said.

The House is expected to vote Thursday on a bill to make permanent the current rates.

The Senate is looking at a different package, under which the first $5 million would be exempted and everything over that would be taxed at 35 percent, or in the range of individual income tax rates. That is a bipartisan proposal and has majority support in the Senate.

But even if the House bill passes, there is some doubt anything could be done by the end of the year, with Congress buried in debate over health care reform, climate change and the Afghanistan war.

Some groups say the tax is a job killer. The American Family Business Foundation and National Black Chamber of Commerce plan to hold a press conference next week to draw attention to estimates showing the tax hurts job growth.

"This is one of the very things they can do that can help immensely with the jobs situation," said Dick Patten, president of the American Family Business Foundation, citing one study showing that eliminating the tax could create 1.5 million jobs.

Patten's group wants the estate tax brought down to zero, but Patten said the Senate bill, which sets the tax at 35 percent, would be a "good step to take" provided it's not just a one-year patch.

The argument is that farmers and small business owners will have less incentive to invest in the economy and grow their businesses, though others complain that if a person doesn't spend that income during his or her lifetime, it is more than once.

"If you have two people who make the same wages during their life and one of them chooses to spend everything just to consume and to have a high standard of living during their life and the other person chooses to set that money aside to save it and to leave it to their children, is there any reason why the second person should be taxed more heavily than the first person?" Viard said.

Fox News' Jim Angle, FoxNews.com's Judson Berger and The Associated Press contributed to this report.