TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, November 16, 2012

TPC: State Estate Taxes After the Fiscal Cliff

Tax Policy Center LogoTax Policy Center:  Back from the Dead: State Estate Taxes After the Fiscal Cliff:

Historically, the federal estate tax provided a credit for state estate and inheritance taxes. This credit, which offset dollar-for-dollar up to 16 percent of an estate’s value against federal taxes, gave states a strong incentive to impose estate or inheritance taxes: states could raise revenue without increasing the net tax burden on their citizens. As a result, all 50 states and the District of Columbia had such taxes directly linked to the maximum value of the credit. The 2001 tax act phased out the credit and replaced it in 2005 with a less-valuable deduction. States responded in three different ways. Some simply repealed their estate taxes. Others decoupled from the federal law, either establishing a stand-alone tax or explicitly linking their taxes to the 2001 law. But most states did nothing, effectively eliminating their estate taxes but leaving in place the legislation that set their estate tax equal to the federal credit. If the 2001–10 tax cuts expire as scheduled on January 1, 2013, the federal estate tax will revert to its 2001 status, bringing back the credit and, with it, the estate taxes of the latter group of states. As a result, 30 states will resume collecting estate taxes, boosting their revenue by about $3 billion in 2013. Whether the state credit revives, the recent history of the federal estate tax highlights both the interrelationship between the federal and state tax systems and the uncertainty federal temporary actions create for taxpayers and other levels of government.

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