It should come as no surprise that President-elect Barack Obama will propose keeping the estate tax which was set to be eliminated, and then hike things back up to pre-Bush rates when the Bush tax cuts expire in 2010. But two things are noteworthy:

First, he wants to keep the tax at the current level–excluding the first $3.5M in estate value and taxing the remainder at a 45% rate rather than reverting to the higher level of tax in effect during the Clinton years (55% rate with an exclusion of only one million). My favorite tax accountant said: “What a Republican! This will keep our estate department employed but practically no one will pay it.” Indeed, this seems like further evidence that President Obama may be more modest in his “change” ambitions than either side expected. “Keeping the estate rate at the George Bush level” isn’t exactly what his left-wing supporters probably had in mind.

Second, this is one of many items–immigration reform and D.C. representation being two others–which Republicans could have negotiated on more favorable terms during the Bush years. Now they must settle for far worse deals in an era of Democratic dominance. As this report explains:

Almost since the change was put in place, repeal advocates have pushed for an earlier permanent elimination in the face of huge budget deficits, with no luck.

They always sensed an estate-tax elimination set far in the future was tenuous at best, especially since the law as written has the repeal last only one year.

Then, anticipating Democratic majorities in Congress that would ultimately seek to block full repeal, the coalition began seeking compromises that would leave a minimal tax in place for a tiny fraction of estates. Estate-tax opponents agreed they would get the best possible deal with Mr. Bush still in office.

But sharp divisions in the coalition emerged between the super rich and the merely rich. Business groups have sought a measure of certainty with an estate tax that is free of graduated timelines or sunset provisions, with the largest possible tax exemption — $10 million, or $20 million per couple. The rate of taxation above that level was of little concern, since virtually every small business would be exempt from taxation.

Yet the super affluent who began the movement wanted the lowest possible rate, since even a $10 million exemption would leave the bulk of their estates subject to tax. They backed a call by Mark Bloomfield of the American Council for Capital Formation to tax all estate transfers as capital gains, at 15%, with little or no exemption.

“The very wealthy, in their quest to reduce their exposure, made proposals that threw the small-business community overboard,” said one prominent small-business lobbyist, referring to a move to have estates taxed as capital gains upon their disposition, without regard to the amount shielded from taxation.

Ms. Soldano said “the small-business people were being shortsighted in thinking, ‘Let’s just fix it now for me.'”
Former Sen. Don Nickles, an Oklahoma Republican who fought the tax his entire political career, said he and Arizona Republican Sen. Jon Kyl must have given 10 speeches to the movement, exhorting them to come together and accept the best that could pass Congress while the GOP had control.

Now, the movement is likely to confront an estate tax that is far bigger than what it may have gotten with more compromise.

“People mistook political reality,” Mr. Bloomfield said. “The end result is we’ll have a worse tax policy than if Sen. Kyl had succeeded.”

So, as with possibly much else in the Obama administration, the estate tax repeal isn’t what conservatives want to hear, but it could have been worse. And it could have been better had Republicans been savvier deal makers in the last few years.