25 States May Revive Estate Tax If No Fiscal Cliff Deal Reached December 27, 2012 Joseph Bishop-Henchman Joseph Bishop-Henchman 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if federal law reverts Alaska Dormant estate tax that might return if federal law reverts Arizona Estate tax entirely repealed 2006 Arkansas Dormant estate tax that might return if federal law reverts California Dormant estate tax that might return if federal law reverts Colorado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. Stay informed on the tax policies impacting you. Subscribe to get insights from our trusted experts delivered straight to your inbox. Subscribe Share Tweet Share Email Topics Estate, Inheritance and Gift Taxes Tags State Tax and Spending Policy
