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 taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. and payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount of the employee requests. from paychecks, defense spending cuts, a higher estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. , 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 |
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State |
State Estate Tax Status |
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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 |
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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 |
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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 |
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Source: Tax Foundation; Tax Policy Center; Federation of Tax Administrators. |