States and Estate Taxes

A phase out of the federal estate tax was a quiet provision in the 2001 tax cuts which is currently creating a good deal of commotion on the state level. The federal estate tax is due to expire in 2010 and this has states frantic as they are certain to lose a revenue source should the repeal become permanent. The Wall Street Journal reports:

While Congress considers slashing or even eliminating the federal estate tax, some revenue-hungry states are taking the opposite approach. Connecticut just approved a law that includes higher taxes on many large estates. Washington state enacted a new estate tax to replace one a court struck down this year. And North Carolina took action to prevent the scheduled demise of its estate tax at midyear. These changes come on top of moves by numerous other states in recent years to protect their own lucrative estate and related taxes, which otherwise would have dried up because of a federal tax law change enacted in 2001.The law included the phase-out of a federal credit for state “death” taxes. Many states had tied their taxes to the amount of this credit, which disappeared entirely this year. As a result of the federal move, states faced losing billions of dollars in revenue. Confronted by this threat, about one-third of the states have taken action to shore up their own estate-tax systems, including separating them from the federal estate-tax system.

The following is a list of states whose estate tax still absorbs the federal credit and those that have decoupled.

31 States absorb the credit.

19 states and Washington, D.C decoupled.