Estate tax rate to be set at 45%

House Democrats passed a freeze of the estate tax Thursday, making permanent the 45 percent rate on inheritances of more than $3.5 million and undoing part of President George W. Bush’s cuts that would have temporarily eliminated the tax next year.

The measure would prevent the estate tax from expiring Dec. 31 and returning in 2011 at a 55 percent rate, a mechanism of the Bush tax cuts that gradually reduced the rate since 2001. Estates under $3.5 million are exempt for individuals and up to $7 million for married couples, leaving about 1 percent of all estates vulnerable to the tax.

“This bill is good for small businesses, good for farmers and good for our nation’s families, providing them with some certainty and stability during uncertain times,” said House Speaker Nancy Pelosi, California Democrat.

She said the bill restored “fundamental fairness” to the tax code and did so adhering to Democrats’ pledge that Congress would “pay as you go” for new spending measures.

It would raise about $14 billion a year but would require borrowing to make up lost revenue in the future - about $233 billion over 10 years - because the rate is lower than rates after 2010 under current law.

Liberal critics say the bill is a giveaway to wealthy families because of the lower rate, and conservatives want a permanent repeal of the “death tax.”

An uphill battle awaits the bill in the Senate. Fierce resistance is expected from Senate Republicans and farm state Democrats, who say the estate tax hurts small businesses and family farms - the same objections raised by the minority in the House.

The legislation passed the House 225-200, with no Republicans supporting the legislation and 26 Democrats voting “no.”

Republicans complained that the 45 percent rate was too high and that the $3.5 million exemption was not indexed to inflation, which would expand the tax to more and more estates in the future.

“Death should not be a taxable event,” said Rep. Dave Camp of Michigan, ranking Republican on the Ways and Means Committee. “Death should not force the sale of family farms or the dissolution of small businesses.”

The Bush cuts gradually reduced the estate tax rate and increasing the exemption since 2001, when estates in excess of $675,000 were subject to a 55 percent estate tax. The tax is set to expire next year, sparing all estates from the tax for 2010 before imposing a 55 percent rate with a $1 million exemption the next year.