The U.S. House of Representatives has passed legislation that would phase out and eliminate estate and gift taxes by 2010. Though the President has said he "would veto it without hesitation," 65 House Democrats voted in favor of the GOP bill, which passed 279 to 136, a large enough margin to override a veto. Still, it faces an uncertain future in the Senate, and Democratic leaders claim that many members of their party who voted for the bill would be less likely to vote against the President’s veto.

Opponents of the bill claim it will be too expensive at $50 billion per year once the phase-out is complete. Also, the bill would eliminate the step-up in basis for many inherited assets, so some beneficiaries would pay higher capital gains taxes on the sale of assets they had inherited. It would allow spouses to take a step-up in basis for the first $3 million transferred, and all other beneficiaries would get a $1.3 million step-up in basis. All other assets would be subject to carry-over basis, which some experts argue would be just as complex as complying with current estate and gift tax rules.

Democratic leaders have introduced an alternative bill that would keep the step-up in basis and the estate and gift taxes but would cut the top estate tax rates 20% across the board. Also, it would remove 99% of family farms and small businesses from the number of taxable estates by granting a $4 million exclusion per family. Of course, the legislation would also eliminate valuation discounts for gifts and bequests.