By Kim Dixon
WASHINGTON (Reuters) - Divisions among Democrats are undermining President Barack Obama's push to raise the U.S. estate tax on inherited wealth, just weeks before the arrival of the "fiscal cliff" could drive the present estate tax rate even higher than Obama proposes.
Action on the estate tax could be postponed. But in his successful re-election campaign, Obama called for wealthy Americans to pay more in taxes - and it is overwhelmingly the wealthy who pay the estate tax.
The outcome may hinge on whether Obama insists on his estate tax proposal - or something close to it - as forcefully as he has insisted on raising individual income tax rates for high income-earners, or whether he lets the issue be put off.
If a single facet of the complicated partisan stand-off over taxing the wealthy best captures Capitol Hill's fiscal gridlock, it may be the estate tax - a long-standing and volatile issue - that may finally be coming to a head.
"If you look at where the public is on tax issues compared to the last time this was debated - it is night and day," said Frank Clemente, campaign manager for left-leaning Americans for Tax Fairness. "They are deep into this tax fairness position."
The "fiscal cliff" is a collection of federal tax increases and automatic government spending cuts that, if allowed to take effect as scheduled early in 2013, could push the U.S. economy into recession, according to economists' forecasts.
Part of the picture is the estate tax.
Under laws signed a decade ago by former Republican President George W. Bush, the estate tax is applied to inherited assets at 35 percent after a $5 million exemption. That means a deceased person can pass on an inheritance of up to $5 million before any tax applies.
Inherited wealth passed to a spouse or a federally recognized charity is generally not taxed.
Obama wants to raise the rate to 45 percent after a $3.5 million exemption. If the Bush rates are allowed to expire and Congress does nothing, the rate will shoot up next year to the pre-Bush levels of 55 percent after a $1 million exemption.
SCHUMER ON ESTATE TAX
New York Senator Charles Schumer on Thursday said the Democrats' proposal to avert the "fiscal cliff" involves $1 trillion in immediate deficit reduction that includes new revenue from raising the estate tax to the level proposed by Obama.
No less a power broker than Democratic Senate Finance Committee Chairman Max Baucus said this week, however, that he wants to hold the estate tax steady at current rates.
Baucus is up for re-election in 2014 from Montana. He says ranch and farm owners in his state would stand to lose if federal taxes rose on passing property to heirs.
"Rural Montana is much different than urban America," Baucus told Reuters in a brief interview in the U.S. Capitol.
He told a Montana newspaper on Sunday that he would even support scrapping the estate tax altogether, as most Republicans favor. A spokesman for Baucus - the Senate's top tax law writer - said he will seek as much estate tax "relief" as he can get.
At least three other rural-state Democratic senators have proposed extending current estate tax rates: Claire McCaskill of Missouri, Jon Tester of Montana and Mark Pryor of Arkansas.
Spokesmen for Pryor and McCaskill said everything is on the table as Congress struggles to deal with the "fiscal cliff."
But one thing is clear: the voice of farming lobbyists is registering with Democrats on the volatile estate tax issue, although it is only marginally about farms and ranches.
BEYOND FARMS AND RANCHES
The estate tax's impact extends beyond farmers and ranchers. It applies mostly to very wealthy Americans, whose taxes have been specifically targeted for increase by a president whom voters returned to the White House just three weeks ago following a tough campaign in which taxes were a key topic.
Of the 3,600 estates subject to the estate tax this year, only 100 are classified as farming estates, according to the congressional Joint Committee on Taxation.
The wealthiest 10 percent of Americans pay nearly all of the estate tax under current rates, according to the Tax Policy Center, a non-partisan fiscal policy think tank.
The number of estates subject to the tax would double under the plan proposed by Obama. About 300 farming estates would be subject to the tax under Obama's terms, which would raise about $100 billion in new revenue for the government over 10 years.
Republicans have benefited previously from Democratic division over the tax. In July, Senate Democrats shelved a plan to raise the estate tax with a symbolic extension of the Bush tax rates for the middle-class.
A senior Senate Democratic aide said the tax was pulled from the bill because Obama felt strongly about boosting the tax. It is unclear how hard he will fight for his position this time.
BY ANY OTHER NAME
The divide between the political parties over the tax is so wide that they cannot even agree on a name for it. Democrats call it the estate tax, as it is described in law.
Republicans, who generally want to repeal it, have another, more provocative name. They call it the "death tax" and characterize it as a penalty on being wealthy and successful.
First enacted nearly a century ago to combat the rise of dynastic wealth and check income disparity, the estate tax is the most progressive tax there is. That means it hits the wealthy much more than lower income groups.
It was a Republican president, Teddy Roosevelt, that proposed the first permanent inheritance tax, arguing that inheritance of "enormous fortunes" does a society no good.
"No advantage comes either to the country as a whole or to the individuals inheriting the money by permitting the transmission in their entirety of the enormous fortunes which would be affected by such a tax," Roosevelt said.
Another decade passed before it was adopted in 1916, partly to fund World War I. The rate has waxed and waned, hitting a high of 77 percent prior to World War II.
(Editing by Kevin Drawbaugh and Dan Grebler)