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New budget would slash federal estate taxes

Tucked onto the second page of the administration's tax proposals is a little-noticed clause that would virtually eliminate federal tax on handing down wealth from generation to generation.

The clause has already been tied onto the tax bill that passed out of the Senate Finance Committee last week. Even opponents concede that some form of estate-tax relief is almost certain to become law.

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The change symbolizes the conservative belief that tax laws aren't a proper tool for redistributing income.

Official Washington thrilled last week to a clash of political titans, as President Reagan muscled through Congress a budget bill that included hand-written amendments and at least one note to call a woman, with her telephone number.

The budget battle grabbed most of the headlines. Meanwhile, the tax-cut bill began to glitter with "Christmas tree" amendments hung on the original, relatively simple, legislation.

One such change -- first proposed by the administration in early June -- would raise the estate-tax exemption from $175,000 to $600,000. The Treasury Department estimates that 97.6 percent of estates would owe no federal tax under this law.

In addition, the gift-tax exclusion would go from $3,000 a year to $10,000, and federal levies on money and property passing between spouses would be eliminated.

"The feeling of Congress was that now is a good time to take care of this inequity, because the main bill has a good chance of passing," a Treasury Department spokesman says.

Though they affect every estate, these changes have long been sought by farmers and small-business men, who claim their descendants often have to sell off property to pay estate taxes.

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It is now "virtually impossible" to pass a family farm down to the next generation, Al Ullman, former chairman of the House Ways and Means Committee, testified before a House panel. Mr. Ullman is now legislative counsel to the Committee to Preserve the Family Business.

The Senate Finance Committee did not change a figure of the administration's proposal to change estate taxes. A spokesman for Sen. Bob Dole (R) of Kansas, the committee chairman, said preservation of family farms and businesses was the primary purpose of the move.

Senator Dole has spoken in favor of entirely eliminating estate taxes. "It's generally assumed that's the next logical step," his spokesman said.

Before 1916, when the current framework was enacted, estate taxes were just another way of raising money. Since then they have also become an instrument of social change.

"Many people believe that the opportunities available to one generation should not be determined, beyond a certain point, by the social and economic position of their ancestors," reads a Joint Committee on Taxation report. "Taxing large transfers of wealth is one way of increasing social and economic mobility."

In his first address on the economy, Ronald Reagan said taxing power should not be used to bring about social change.Critics grumble that the estate-tax clause fits with that promise.

"I don't think anybody really seriously contends they're doing this to benefit family farms," says Jay Angoff, an attorney for the Tax Reform Research Group. "They're pretty frank. They just don't like the estate tax."

Mr. Angoff and others point out that eliminating most estate taxes aids only the richest people in the country. Currently, only individuals whose income was in the top 3 percent end up having their estates subject to federal tax.

They say the dollar ceiling doesn't have to be raised for inflation, since the current level of $175,000 became applicable only this year.

And finally critics say many charities and universities, which depend on deductible gifts from estates, may suddenly find their funds drying up.

Those who favor repeal of estate and gift taxes argue that the levies are a powerful disincentive to work and saving. Why slave over a desk all day, they argue, if your children will be no better off in the long run?

They say the tax dollars involved are relatively insignificant -- only an estimated 1.2 percent of total revenues this year. The clause would cost the Treasury Department $100 million in lost revenue next year, and a total of $5.8 billion by 1986.

And proponents say inflation is a factor. Under a gift-tax exclusion of $3, 000, a grandparent cannot give a car or a university education tax-free.

The House Ways and Means Committee, moving more slowly than the Senate on tax legislation, has yet to consider the question of state taxes. Two members of the committee, Rep. J. J. Pickle (D) of Texas and L. A. Bafalis (R) of Florida have proposed a more specific clause that would affect only farms and businesses , and not estates in general.

So even those who believe that the social purpose of estate taxes remains valid are gloomy about the outcome.

"Once you've agreed to cut business taxes by half a trillion dollars [by 1990 ], a few hundred million a year is nothing to get excited about," say s Jay Angoff ironically.

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