State Tax Snapshot: State Death Tax Credit Is Tossed Over the Fiscal Cliff


For the most part, the American Taxpayer Relief Act of 2012 (ATRA), which President Obama signed into law Jan. 2, will maintain the status quo for the states.  This is primarily because many key aspects of the legislation, such as changes to federal tax rates, will not be implemented at the state level.

Provisions such as the extension of bonus depreciation and enhanced expensing are more significant because they affect the federal tax base. But even here, the impact is likely to be minimal because most states have already decoupled from those provisions, Michael Mazerov a senior fellow with the Center on Budget and Policy Priorities told BNA recently.

Perhaps more significant for the states is what ATRA did not do. For purposes of the federal estate tax, ATRA "could have brought back the state death credit, but it didn't," Mazerov said.  This means that the majority of states that have retained long dormant "pick up" taxes based on the amount of the federal credit will be permanently cut off from this source of revenue.

The state death tax credit suffered a slow death. Congress phased out the credit from 2002 through 2004 and eliminated it in 2005. Beginning in 2005, the credit was replaced with a deduction for state death taxes paid.

But before the credit was permanently eliminated under ATRA, it was set to revive in 2013. Amid the speculation about the fiscal cliff in November, the Tax Policy Center estimated that the credit's return would boost state revenues by about $3 billion in 2013 alone.   

"Should these 'dormant' states anticipate the return of the [federal credit for state death taxes] and the resultant additional revenue," the Tax Policy Center asked. Among the states that answered in the affirmative was New Mexico, which specifically noted that the return of the credit was a positive risk to its revenue estimate, the Tax Policy Center noted.

With the enactment of ATRA at least two states have already given last rites to their pick up tax regimes. California's Legislative Analyst's Office recently acknowledged that the state would not receive revenue from estate taxes without the enactment of state legislation, the Sacramento Bee reported.  Similarly, the Wisconsin Department of Revenue announced on its website that "the credit for state death taxes paid, which would have been the basis for Wisconsin's estate tax, has been eliminated."

By Steven Roll

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