State Tax Snapshot: Will a Dive Off Fiscal Cliff Revive State Death Taxes?

If Congress and President Obama fail to strike a tax deal to avert the so-called “fiscal cliff,” taxpayers subject to the estate tax could leave their heirs facing both federal and state tax liabilities.


The death taxes seemed to be dead when the federal estate tax was phased out under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and set for repeal in 2010. But Congress brought new life to the death tax by enacting the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The 2010 Act reinstated the estate tax for 2011 and 2012 with a higher exclusion and a lower tax rate.

As with the other provisions that make up the fiscal cliff, the temporary estate tax exclusion and rate are set to expire on Jan. 1, 2013. As a result, taxpayers subject to the estate tax will face a top federal tax rate of 55 percent (up from 35 percent) and an exclusion of $1 million (down from $5.12 million).

Plus, there will be state death taxes. A provision that will reappear in 2013 will be the federal credit for state death taxes, which was replaced with a deduction for state taxes paid under EGTRRA. Before the credit was replaced, the states imposed a “pick up” tax that was designed to impose a levy in the amount of the federal credit. When the credit was repealed, most states’ death taxes remained dormant.

In fact, 25 states still have laws on the books that explicitly reference the federal credit, according to a recent report by the Tax Policy Center. Among these, the report notes, is New Mexico, which imposes an estate tax “in an amount equal to the federal credit… on the transfer of the net estate of every resident.” Other states decoupled from EGTRRA by referencing their estate tax provisions to a version of the federal tax code that existed before the credit was repealed. The report estimates that if the federal estate tax provisions fall off the cliff, as many as 30 states will resume collecting estate taxes, boosting their revenue by about $3 billion in 2013.

By Steven Roll

Follow us on Twitter at: @SALTax 
Join BNA's
State Tax Group on LinkedIn