25 States May Revive Estate Tax If No Fiscal Cliff Deal Reached

December 27, 2012

President Obama just landed at Andrews Air Force Base, returning to Washington in the hopes of slamming together a deal to avert the fiscal cliff, which will otherwise occur next Tuesday. The initial manifestations of that will include higher income tax and payroll tax withholding from paychecks, defense spending cuts, a higher estate tax, and continued anguish for the IRS as they cannot produce 2012 tax forms until some kind of deal is reached. (Coincidentally, the U.S. will also hit the debt ceiling on New Year’s Eve, although Geithner can juggle the books for a couple months to avoid default.)

Less reported is the existence of dormant state estate taxes, ready to return on January 1, 2013 as the federal estate tax reverts to pre-2001 law. Under pre-2001 federal law, any amounts paid under a state estate tax were fully credited against federal estate tax liability; it was essentially free money for states that set up an estate tax, money that would otherwise go to the feds. This “pick up tax” or “sponge tax” structure was changed in 2001-05 to be a deduction, ending the free ride for states.

States then had the choice to retain their estate or inheritance taxes with it costing real dollars from their citizens (22 states and the District of Columbia), or repeal them (the other 28 states, plus Delaware and Ohio as of 2013, Tennessee as of 2016, and Indiana as of 2022). But some states have “zombie” tax provisions that kick into effect as soon as federal law allows the full credit again. Here’s a table of what happens absent congressional or state legislative action:

Table: Status of State-Level Estate Taxes on January 1, 2013 with No Fiscal Cliff Deal

State

State Estate Tax Status

Alabama

Dormant estate tax that might return if federal law reverts

Alaska

Dormant estate tax that might return if federal law reverts

Arizona

Estate tax entirely repealed 2006

Arkansas

Dormant estate tax that might return if federal law reverts

California

Dormant estate tax that might return if federal law reverts

Colorado

Dormant estate tax that returns if federal law reverts

Connecticut

Existing estate tax

Delaware

Existing estate tax; expires July 2013

Florida

Dormant estate tax that might return if federal law reverts

Georgia

Dormant estate tax that returns if federal law reverts

Hawaii

Existing estate tax

Idaho

Dormant estate tax that returns if federal law reverts

Illinois

Existing estate tax

Indiana

Existing inheritance tax; expires 2022

Iowa

Existing inheritance tax

Kansas

Estate tax entirely repealed 2010

Kentucky

Existing inheritance tax

Louisiana

Dormant estate tax that might return if federal law reverts

Maine

Existing estate tax

Maryland

Existing estate and inheritance tax

Massachusetts

Existing estate tax

Michigan

Dormant estate tax that might return if federal law reverts

Minnesota

Existing estate tax

Mississippi

Dormant estate tax that returns if federal law reverts

Missouri

Dormant estate tax that returns if federal law reverts

Montana

Dormant estate tax that might return if federal law reverts

Nebraska

Existing inheritance tax

Nevada

Dormant estate tax that returns if federal law reverts

New Hampshire

Dormant estate tax that returns if federal law reverts

New Jersey

Existing estate and inheritance tax

New Mexico

Dormant estate tax that returns if federal law reverts

New York

Existing estate tax

North Carolina

Existing estate tax

North Dakota

Dormant estate tax that returns if federal law reverts

Ohio

Existing estate tax; expires January 2013

Oklahoma

Estate tax entirely repealed 2010

Oregon

Existing estate tax

Pennsylvania

Existing inheritance tax

Rhode Island

Existing estate tax

South Carolina

Dormant estate tax that returns if federal law reverts

South Dakota

Dormant estate tax that might return if federal law reverts

Tennessee

Existing inheritance tax; expires 2016

Texas

Dormant estate tax that returns if federal law reverts

Utah

Dormant estate tax that returns if federal law reverts

Vermont

Existing estate tax

Virginia

Dormant estate tax that returns if federal law reverts

Washington

Existing estate tax

West Virginia

Dormant estate tax that returns if federal law reverts

Wisconsin

Dormant estate tax that returns if federal law reverts

Wyoming

Dormant estate tax that might return if federal law reverts

District of Columbia

Existing estate tax

Source: Tax Foundation; Tax Policy Center; Federation of Tax Administrators.

 

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