Can estate tax legislation make it on its own?

Washington suddenly turned its attention back to broad tax reform on Thursday, when the leaders of the Senate tax-writing committee challenged their colleagues to think anew about the code.

Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, and the panel’s top-ranking Republican, Sen. Orrin Hatch, R-Utah, hypothetically eliminated all tax breaks and asked the other 98 senators for ideas on which should be added back.

This assignment, which is due on July 26, brought new purpose to the Senate’s efforts on comprehensive reform. The House Ways and Means Committee also has been laying the groundwork for reform.

Despite this activity, pessimism remains high about Congress’ ability to accomplish an overhaul of the tax code by the end of 2014, given the wide policy divide between the House and Senate on most issues. In addition, the Obama administration has shown little interest in the topic.

But can the code be tweaked short of an overhaul? Supporters of abolishing the estate tax hope that it is a candidate to move as standalone legislation.

Bills that would scrap the inheritance levy were introduced last week in the House by Rep. Kevin Brady, R-Texas, chairman of the Joint Economic Committee, and in the Senate by Sen. John Thune, R-S.D., chairman of the Senate Republican Conference. Last year, similar bills attracted 222 and 37 bipartisan co-sponsors, respectively.

“I think we have a good chance to pass it through at least the House next year,” said Palmer Schoening, executive director of the Family Business Coalition.

The group argues that the estate tax hurts small companies and farmers because it makes it difficult for owners to pass enterprises on to their relatives. Supporters of the estate tax say that raising the rate and lowering the exemption — now set at 40% and $5.25 million, respectively — would ensure that the wealthy pay more in taxes and make the system fairer.

Mr. Schoening’s optimism about Mr. Thune’s and Mr. Brady’s bills is based partly on two estate-tax votes earlier this year.

During Senate debate on the budget resolution, Mr. Thune offered an amendment to abolish the estate tax. It was defeated, 53-46, but did attract two Democratic votes. Mr. Thune’s measure did not require new revenue to pay for reform.

Another amendment to scrap the estate tax, which did require new revenue, was approved, 80-19. Offered by Sen. Mark Warner, D-Va., it was supported by 45 Republicans and 35 Democrats. The underlying bill provides a budget blueprint for Congress but is not binding.

“Amidst gridlock, this is an area where Congress can come together,” Mr. Schoening said. “The Senate has acknowledged the death tax is a problem. The question is: How do we deal with it?”

One investment adviser is pessimistic about estate tax legislation because the versions offered by Mr. Thune and Mr. Brady do not contain so-called “payfors.”

“I don’t see them passing a bill without an offset,” said Tim Steffen, senior vice president and director of financial planning at Robert W. Baird & Co. Inc.

The bigger problem is that the estate tax could be held in abeyance indefinitely because it is a bargaining chip in tax reform talks. That brings us back to the underlying question of whether lawmakers have the wherewithal to do something as big as tax reform.

“Nobody expects much out of Congress because there’s such an inability to negotiate anything,” Mr. Steffen said.

That atmosphere may choke even estate tax legislation.