The Senate appears headed for another showdown on repeal of the estate tax, possibly before the August recess. With permanent repeal costing around $1 trillion over the first 10 years, there is discussion between Senate Republicans and Democrats on possible reform options. It is unclear whether these discussions on reform may turn into a back-door approach by pro-repeal groups to push through legislation that would amount to a virtual repeal of the estate tax. This spring, Senate Minority Leader Harry Reid (D-NV) asked the chair of the Democratic Senatorial Campaign Committee, Sen. Charles Schumer (D-NY), to begin investigating a possible compromise with Senate Republicans on the estate tax issue. Advocates of permanent repeal have needed 60 votes in the Senate to achieve their objective, but have fallen short of the mark. Even after Republicans picked up four Senate seats in the last election, it is unlikely that repeal advocates have enough votes. Nonetheless, pro-repeal groups, primarily business leaders and conservatives, have used the estate tax as a political wedge issue. For example, the National Beer Wholesalers Association has run print ads in support of repealing the tax. Many believe that similar ads were a factor in the loss by Minority Leader Tom Daschle in his re-election bid last November. Democrats, particularly senators up for re-election, remain nervous about the power of such ads. On the other side, Sen. Jon Kyl (R-AZ), who is a champion of permanent repeal, is leading the reform negotiations for the GOP. Realizing that full repeal is out of reach in the Senate for at least the next two years, Kyl and other Republicans are feeling pressure to compromise as well. Unlike their Democratic colleagues, however, it is not concerns over re-election, but rather over budget deficits, that is putting pressure on Republicans. It is clear both sides agree the phase-out of the estate tax passed in 2001 is poor tax policy and needs to be changed. But any change or compromise that would raise the exemption levels or lower the rate (or in fact any reform that would extend the changes implemented in 2001) would have a drastic impact on the federal budget. Full repeal of the estate tax would cost close to $1 trillion over the first 10 years of repeal when debt interest is included. With deficits already soaring and many other high priority issues needing to be addressed (such as the Alternative Minimum Tax, Social Security, and huge increases in health care and defense/war costs), each year Republicans wait to act on the estate tax makes it that much more difficult to pass a compromise that is closest to repeal. Strikingly, as time marches on, some who supported repeal of the estate tax are now questioning their position. For example, Sen. Ron Wyden (D-OR), who has regularly voted to repeal the estate tax recently told the publication Tax Analysts, "The deficit picture is different today and the choices are pretty darn hard… There's three or four horses in this race, and I wouldn't bet against the AMT.” Wyden, and other Senators who have supported repeal in the past, such as Sen. George Voinovich (R-OH), are starting to realize they will have to make choices between some very expensive options. Yet despite these realities, thus far the negotiations have not yielded many tangible results. Kyl and other Senate Republicans, including Majority Leader Bill Frist (R-TN) appear to be growing increasingly frustrated with the lack of a compromise. Both Frist and Kyl have been issuing statements in the press with threats of a vote on full repeal in order to force Democrats into a bad compromise. Such maneuvering is leading many to question whether Kyl is genuine in his desire for a compromise on this issue. Negotiations are also being slowed by rumors of Kyl's unwillingness to move far from the proposal he introduced in a stand-alone bill earlier this year of a $10 million exemption ($20 million for couples) and a rate of 15 percent for the estate tax. This proposal, which would cost the federal government 90 percent as much in revenue as full repeal and is thus tantamount to full repeal, is largely unacceptable to Democrats. Even costlier still, Kyl has floated a slight modification by lowering the amount exempted from the tax to $8 million ($16 million), but tying the taxable rate to the capital gains rate, rather than setting it specifically at 15 percent. If this were to take place and Republicans succeed in their efforts to lower or zero out the capital gains tax, the estate tax would be repealed. It is highly likely that the President's Advisory Panel on Federal Tax Reform will include in its recommendations lowering the capital gains rate significantly from its current level of 15 percent, perhaps even to zero percent. Even more so than Kyl's original proposal contained in his bill, this proposal opens the backdoor to full estate tax repeal. As the negotiations move forward, it is essential for Democrats and moderate Republicans not to agree to a compromise at any cost. The importance of the estate tax, in terms of the progressivism it adds to the tax code, the incentive for charitable giving it provides, and the revenue it brings in for essential services and investments in communities compels a call for responsible reform. Bad reform could remove the estate tax as a hot-button election year issue, but it could lead to a back-door repeal of the estate tax.