If Congress does nothing, the federal estate tax law reverts to pre-2001 parameters, including an obscure provision known as the state death tax credit that allows states to share in estate tax revenue the Treasury collects. As a result, 30 states would resume collecting estate taxes, boosting their revenue by about $3 billion in 2013, calculates Norton Francis, a senior research associate at the Urban Institute in Back From the Dead: State Estate Taxes After The Fiscal
Some states are already counting on the revenue. Gov. Jerry Brown’s multi-year budget estimate for California assumes $45 million of estate tax collections in 2012-2013, $290 million in 2013-2014,
$725 million in 2014-2015, and $1.2 billion in 2015-16, says Jason Sisney, a deputy at the nonpartisan Legislative Analyst’s Office, which has warned the state administration not to count on it.
Colorado has also built a return of the credit into its state budget; it shows $45 million of revenue in fiscal year 2013 and $94 million in fiscal year 2014. New Mexico mentioned it as an upside risk but did not build it into their estimate.
“It’s pretty presumptuous; you don’t know what’s going to happen,” says David Brunori, contributing editor to State Tax Notes, adding, “Congress should be debating whether the credit is a good idea or a bad idea.”
The federal-state revenue sharing via the credit was the way things worked for decades. Then at the last minute, a provision was added to the Bush tax cuts that gradually phased out the state death tax credit,
so by 2005, the feds got to keep all the revenue.
That led to a patchwork quilt of state laws. Some states enacted stand-alone estate taxes; some states repealed all references to the estate tax; and in 30 states, estate taxes remain “dormant” unless the state credit is resurrected. Francis’ report has the breakdown.
The federal estate tax is on the radar. But most people, when they think about the estate tax, they think about the exemption amount (that’s how much you can die with without worrying about the tax) and the
tax rate (what you pay on any amount over the exemption), not whether states are sharing in the revenue, says Francis.
The “state death tax credit” basically allows states to piggyback on the federal estate tax. The estate’s overall tax bill isn’t any higher; you pay state estate taxes and get a credit towards your federal estate taxes. The credit offsets up to 16% of an estate’s value against federal tax—not surprisingly most states set their top rate at 16%.
The credit allowed for a uniform estate tax across all 50 states and the District of Columbia. Its
repeal increased complexity for both state governments and taxpayers. Forbes has an interactive map showing state estate and inheritance taxes for 2012 here.
Under current law, the exemption from the federal estate tax is $5.12 million per person, with a flat rate of 35%, and a less valuable deduction for state estate taxes paid. On Jan. 1, the exemption is set to dip to $1 million, and the tax rate is set to rise from 35% to as high as 55%, with the state credit restored. However, President Barack Obama’s budget proposal is for a $3.5 million exemption, a flat rate of 45%, and a continuation of the deduction instead of the state death tax credit.
Wealthy backers of the estate tax have included the credit in the Responsible Estate Tax Proposal they’ve been shopping on Capitol Hill this week. “It worked well in the past, and states need revenue too,” says Mike Lapham, director of Responsible Wealth, a project of the non-partisan, non-profit United for a Fair Economy.
But the federal government is broke, Brunori notes: “Congress has to make a decision whether they can afford to keep handing out money, in this case to the states with the estate tax.”