WASHINGTON – The unpopular estate tax is in the process of being phased out, but under the current rules, one year after it is gone altogether, it will come back at its original rate.
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When President Bush and Congress get back from their summer break next month, one of the issues still on the table will be the president's call to end the estate tax for good.
Flanked by his economic team, Bush recently pressed Congress to repeal the estate tax, which has been dubbed "the death tax" by its opponents.
"We need to have certainty in the tax code. That's why I strongly believe that the tax relief we passed must be permanent, the death tax repealed forever," Bush said earlier this month.
But top congressional Republicans have abandoned the president's goal of full repeal. Instead, they're negotiating with Senate Democrats for a permanent, albeit much smaller, estate tax.
"There is a reason for both sides to compromise here for something that would be short of full repeal but would still provide a substantial reduction," said Sen. Jon Kyl (search), R-Ariz.
Republicans say they are settling for less than full repeal because they can't find the 60 votes necessary to end a Democratic filibuster. Republicans have 55 members in the Senate while Democrats have 44. One independent lawmaker votes with Democrats.
Analysts say Congress cut estate taxes in times of federal surpluses, but deficits have changed the equation.
"The trade-offs involved are shifting more of the tax burden onto middle-income folks or cutting programs," said Joel Friedman, a senior tax fellow at the Center for Budget and Policy Priorities.
Bush's first tax cut, enacted in 2001, began cutting the rate on the estate tax. For tax year 2005, the rate is 47 percent on estates worth more than $1.5 million. The tax bite will fall gradually according to the 10-year plan with the rate dropping in 2009 to 45 percent for estates worth more than $3.5 million. In 2010, the estate tax disappears entirely, but it reappears one year later at its original rate of 55 percent.
"We certainly don't want the thing that goes down, disappears and then goes back up because, first of all, there is a huge amount of uncertainty around that," said Jim Glassman, an economist at the American Enterprise Institute.
Kyl is pressing for a much smaller estate tax rate to be applied and exemptions for all but the largest estates.
"The exempted amount could be something in the neighborhood of $5 million or above and the rate should be the capital gains rate. Right now, it's 15 percent," he said.
Democrats complain that a rate that low would cost $50 billion in revenue each year, roughly 90 percent of projected estate tax revenue. They're demanding an estate tax rate that preserves at least half of current revenues.
"It's really the rate that is important to retaining a significant amount of revenues," Friedman said.
Earlier this year, a large bipartisan House majority passed a permanent estate tax repeal.
"I believe that the death tax is politically misguided, morally unjustifiable and downright un-American," said Rep. Sanford Bishop, D-Ga.
Even so, top House Republicans support the Senate's efforts to cut an estate tax deal because they say they believe a chance to combine an estate tax compromise with Social Security reform could attract Democratic votes that right now appear off limits.