This page is copied from the Center
for Budget and Policy Priorities website. Links are directly to the Internet.
This page is copied from the Center
for Budget and Policy Priorities website.
Links are directly to the Internet.
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Congress has passed and sent to the White House legislation that would repeal the federal estate, gift, and generation-skipping transfer tax by 2010. Under this legislation, the estate tax would be reduced gradually over the next decade, leading to full repeal in calendar year 2010. Once the proposal was fully in effect — and the estate tax had been repealed — the proposal would cost the federal government about $50 billion a year. State governments also receive revenue through the federal estate tax. Under the current provisions of the federal estate tax, taxpayers receive a dollar-for-dollar credit against their federal estate tax liability for state estate and inheritance tax payments up to a specified amount. The maximum amount of the credit varies by the size of the estate.
States Share in the Federal Estate Tax Thirty-five of the 50 states currently have an estate tax that equals the amount of the state credit, with there being no other state estate or inheritance tax. In these states, the state law refers specifically to the amount allowed as a credit against the federal estate tax. This is commonly referred to as a "pickup" tax. A pickup tax provides revenue to the state but does not increase the federal estate tax payment the heirs must make. Instead, the estate's federal estate tax liability is reduced by the amount of the state tax payment. Some 15 states also have their own inheritance or estate taxes, a portion of which qualifies as a pickup tax. In all of these 15 states, the state laws specify that if the amount of the state tax is less than the credit allowed against federal taxes, the state tax is increased to the amount of the credit. In cases where the state liability is greater than the credit, federal estate taxpayers receive a credit for the portion of their state tax that equals the maximum allowable credit. Two of these 15 states are phasing out their separate tax and will rely only on the pickup tax in the future. (1) Table 1 shows the estate and inheritance tax provisions of the states. The repeal of the federal estate tax would negate a compromise reached between the federal government and the states many years ago when the federal estate tax was first enacted. The federal estate tax was established in the early 1900s. Until that time, the taxation of estates and inheritances was considered the prerogative of the states. States objected to the establishment of a federal estate tax because they felt it infringed on one of their traditional tax bases. As a compromise, Congress included the state credit in the federal tax, thereby guaranteeing states a portion of the estate tax base. In recent years, a number of states have changed their own estate and inheritance taxes to rely solely on a pickup tax equal to the maximum federal credit. This has left them vulnerable. If the federal estate tax — and therefore the federal credit — are repealed, the action would repeal automatically the estate taxes of most of these states. Other states that have retained some version of their own estate or inheritance tax are likely to lose some, but not all, of their revenues from this source. While it could be argued that states could retain this revenue by reinstating a state estate or inheritance tax, in many states, this would be unlikely to occur. It would require the passage of new legislation in each state establishing what would be labeled a new tax. This could be very difficult to accomplish in the current political climate. (As noted, in states with pickup taxes, the pickup tax does not increase the amount of tax levied on an estate but simply shifts some of the revenue from the federal government to the state. If the federal estate tax is repealed, any action by these states to impose an estate tax would likely be attacked as constituting an increase in tax burdens.)
Most States with only a Pickup Tax Would Lose This Revenue if the Federal Estate Tax Were Repealed In most states with only a "pickup" estate tax — that is, an estate tax that is set to equal the amount of the federal credit — repeal of the federal estate tax would automatically repeal the state estate tax.(2)
It is difficult to determine precisely the revenue loss to states from the repeal of the federal estate tax. There are no state-specific projections available on the amount of revenue that would be lost to states if the federal estate tax were phased out over a period of time. However, there are data from the IRS on the amount of the state credit for recent years and data from states on their estate and inheritance tax collections. These can be used to estimate the expected magnitude of the revenue loss to states of the repeal of the federal tax. For states that have only a pickup tax, Table 2 shows two amounts. The first column shows the average annual amount of state taxes credited against the federal estate tax for each state between 1995 and 1997, the most recent years that federal data on the amount of the state credit by state are available. For states with only a pickup tax, this amount is approximately equal to the average annual amount of state estate taxes collected in those years.(3) A three-year average is shown because estate tax revenue at the state level can fluctuate significantly from year to year; in smaller states in particular, the death of one highly wealthy individual can produce unusually high revenues for a single year. (The source of these data are the Statistics of Income bulletin of the Internal Revenue Service.) The second column shows each state's estimate of estate tax collections for state fiscal year 2000. This information, from budget documents and discussions with state revenue officials, provides more recent information on the amount of revenue a state collects in estate taxes. Since these are states that have only a pickup tax, all of these revenues are a result of the state credit on the federal estate tax. For example, Table 2 shows that Michigan received approximately $80 million a year from the pickup tax from 1995 to 1997. Had the estate tax repeal been in effect in those years, Michigan would have lost approximately $80 million in revenue a year. More recently, estate tax collections have increased in Michigan to an estimated $187 million in fiscal year 2000, all of which would have been lost had the federal estate tax been repealed. Together, the states relying solely on the pickup tax would have lost $4.4 billion in revenue had the federal estate tax been repealed in fiscal year 2000.(4)
States with Separate Estate or Inheritance Taxes Would Also Lose Substantial Revenue States that levy their own estate or inheritance taxes in addition to the pickup tax would continue to collect those taxes if the federal tax was repealed. However, as noted above, all these states provide that if the amount of the state tax is less than the credit allowed against federal taxes, the state tax is increased to the amount of the credit. As a result, these states would also lose revenue if the federal estate tax — and thus the credit — were repealed.
It is more difficult to identify the specific amount of the revenue loss in these states because of the interactions between the state inheritance and estate taxes and the federal credit. Table 3 shows the amount of the state credit against the federal estate tax for each of these states. However, the revenue a state would lose as the result of the repeal of the federal estate tax is less than the total amount of the credit in states with separate taxes. Table 3 also includes estimates of the incremental amount of state revenue raised as a result of the pickup provisions of the estate tax. The latter information was collected through survey of revenue officials in each of these states. If the federal estate tax had been repealed in fiscal year 2000, each state would have lost approximately the amount of revenue shown in the second column of Table 3. Together, these states with their own estate or inheritance taxes in addition to the pickup tax would have lost approximately $1.1 billion in revenue in fiscal year 2000.
Total State Revenue Loss The total revenue loss for all states, had the federal estate tax been repealed for fiscal year 2000, would have been approximately $5.5 billion — $4.4 billion for the states solely relying on the pickup tax and $1.1 billion for the states using the pickup tax along with their own estate or inheritance taxes. Estate tax revenues are expected to grow by approximately 60 percent between now and 2010, when estate tax repeal would be fully in effect in the legislation Congress has passed. State pickup tax revenues would likely grow in tandem with the federal revenues. Thus, the revenue loss to states when the repeal would be fully in effect in 2010 would approach $9 billion a year.(5)
Repeal of the Estate Tax Would Benefit the Wealthiest Taxpayers While Reducing the Amount of Revenue for Services for All State Residents The federal estate tax — and thus the state pickup tax that is part of the federal tax — is paid solely by the wealthiest two percent of people who die each year.
As these statistics make clear, the estates of a tiny fraction of the people who die each year — those with very large amounts of wealth — pay the bulk of all federal estate taxes. Moreover, a recent Treasury Department study shows that almost no estate tax is paid by middle-income people. Most of the estate taxes are paid on the estates of people who, in addition to having very substantial wealth, still had high incomes around the time they died. The study found that 91 percent of all estate taxes are paid by the estates of people whose annual incomes exceeded $190,000 around the time of their death. Less than one percent of estate taxes are paid by the lowest-income 80 percent of the population, those with incomes below $100,000. Thus, the elimination of state estate taxes through the repeal of the federal estate tax would benefit the wealthiest taxpayers in the state. At the same time it would reduce the amount of revenue available to finance services for all state residents.
State-by-State Fact Sheets
End Notes: 1. In addition to state estate and inheritance taxes, four states — Connecticut, Louisiana, North Carolina and Tennessee — levy taxes on gifts of money or property that exceed a specific level. These state gift taxes do not affect the revenue collected from the state's pickup of the federal estate tax and would not be affected by the repeal of the federal estate tax. 2. Among the states with only a pickup tax, there are a few exceptions such as Virginia and the District of Columbia where the state estate tax statute refers to the federal estate tax law as of a particular date. In these states, the amount of state estate tax owed would be calculated based on the amount of the federal credit prior to its repeal. However, even in these states, the intent of the state estate taxes appear to be the same as in the other pickup tax states. In addition, in order to continue collecting this tax, these states would have to take over the administration of the tax and require estates to file a form similar to the current federal form. As a result, there is a strong likelihood that these states would act to repeal their estate taxes when the pickup taxes in other states were eliminated. 3. Note that state data on estate tax collections may not match IRS data because of different fiscal years and because the timing of state and federal estate tax payments may vary for the same estate. 4. As Table 2 shows, the amount of revenue that states collect through the pickup tax has increased significantly in recent years as federal estate tax collections have grown. Revenues from the federal estate and gift taxes are projected to increase from an average of $17.2 billion from 1995 to 1997 to $30 billion in 2000. 5. Both the federal and state revenue projections included here present growth in nominal terms — that is, they are not adjusted for inflation. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
