Take your pick of the huge bills Congress can anticipate in the next few years – interest on the debt, reform of the alternative minimum tax, the war on terrorism. What’s clear is that the federal government is spending considerably more than it is taking in now and will confront much higher demands for spending in a couple of years, a situation that would be made worse by the proposed repeal of the estate tax.

Reform of this tax is inevitable given the half-baked way Congress set it up last time – exemptions grow through 2009, the tax is eliminated in 2010 then reverts to 2001 levels in 2011, after which resides accounting uncertainty, a condition no side in this debate likes. But if the Senate can look ahead even a few years, it should banish the idea of repeal and find a compromise that prevents, say, allowing the AMT to whack the middle class while it gives a tax break to those with $100 million estates. The good news is that repeal, which would reduce revenues by $290 billion over 10 years, not counting interest on the debt, seems less likely in the Senate despite the House voting in support.

The estate tax has two mechanisms that can be adjusted to achieve reform: the size of its exemption – $3.5 million in 2009 – and the rate at which an estate is taxed above that exemption. The top rate would be 45 percent by then. The leading proposal in Congress would drop that top rate to 15 percent, the level at which capital gains are taxed, which would largely eliminate the tax and, of course, the revenue.

That is a terrific break for huge estates. But if the concern is to protect small businesses and family farms – and it’s a concern that has been stated endlessly even as the number of such businesses affected is shown to be comparatively minuscule – then the mechanism to move is the exemption level.

Keeping a higher rate but increasing the exemption to $5 million or $6 million would protect nearly every small business, including those that have not taken common steps to establish trusts or anther means to shield wealth. All of the exemption numbers discussed in this debate, by the way, double for couples.

Neither Sens. Olympia Snowe nor Susan Collins likes the estate tax; both recognize the federal government’s need to practice greater fiscal responsibility. Were they to support a reform to raise the exemption and keep it tied to inflation, they would offer relief and predictability to most estates affected by the tax without wiping out another revenue line. Given the reality of the Senate, a decrease in the rate is still likely, but 15 percent is considerably too low. A better number might be around the top income tax rate, paid on income above $300,000, as planned with the gift tax. That rate is 35 percent.

To be clear, Congress has cut revenue and spent itself into a serious fiscal hole while it faces major costs in the next couple of years. But if it is determined to reduce a tax that already exempts more than 98 percent of all estates, it should do so by increasing its exemption and leaving its rate largely alone.