Thursday, December 27, 2012

State death taxes are about to be resurrected

Fewer than half the states impose death taxes this year.  The decline of state death taxes began with the elimination of the federal estate tax credit for payment of state death taxes, phasing out after 2001.

Please note that I am not making a political statement when I use the politically charged term "state death taxes."  That was what the tax code called the credit, it didn't come from an anti-tax focus group.

When the credit was converted to a deduction, the impact on taxable estates was nominal. But the impact on states was huge, because they could no longer impose the "mop-up" version of a state estate tax, linking their death tax measurement to the federal credit.  Some states thus lost the ability to impose a death tax, based upon state constitutions, and others gave it up voluntarily.  In the larger scheme, this was a revenue grab by the feds from the states, and it worked.

When the Bush tax cuts expire, as they surely will, the deduction for state death taxes will go back to being a credit.  Most states may be expected to restore their death taxes.   Conveniently, the federal exemption of $1 million matches the exemption of many of the states that had decoupled from the federal system to preserve their own death taxes.

Apparently, California is already counting on this new revenue source.  Makes me suspicious.  I wonder if anyone was ever really serious about avoiding the fiscal cliff? Maybe both sides really wanted to go over it, which is why all the jockeying is about who gets the blame?

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