Revised, December 12, 2000
Repeal of the Federal Estate Tax
Would Cost State Governments Billions in Revenue
by Elizabeth C. McNichol, Iris J. Lav and Daniel Tenny
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Earlier this year, Congress passed and sent to the White House legislation that would have repealed the federal estate, gift, and generation-skipping transfer tax by 2010. Under this legislation, the estate tax would have been reduced gradually over the next decade, leading to full repeal in calendar year 2010. Once the proposed legislation was fully in effect and the estate tax had been repealed the proposal would have cost the federal government about $50 billion a year. President Clinton vetoed the proposal on August 31, 2000, but similar or related legislation is expected to be introduced in the coming year.
State governments also receive revenue through the federal estate tax. Under the current provisions of the federal estate tax, taxpayers receive a dollar-for-dollar credit against their federal estate tax liability for state estate and inheritance tax payments up to a specified amount. The maximum amount of the credit varies by the size of the estate.
- Currently, every state has a tax on estates equal to at least the value of the credit that can be taken against federal liability. In most states, the estate and inheritance taxes are designed in such a way that states would face either a full or partial loss of revenues if the federal estate tax were repealed. Approximately two-thirds of the states could face total loss of estate tax revenue as a result of the federal repeal.
- The amount of revenue lost to states would be substantial. Information gathered from state budgets and state revenue officials suggests that states together would have lost approximately $5.5 billion in revenue in fiscal year 2000 if estate tax repeal had already been in effect. By 2010, when the estate tax repeal would be fully effective under the proposed legislation, the state revenue loss would approach $9 billion.
- The amount of potential revenue loss for each individual state varies depending on the design of the state's specific inheritance and estate tax. The impact would be greatest in the 35 states that rely entirely on the state credit against the federal tax for their estate tax revenues.
States Share in the Federal Estate Tax
Thirty-five of the 50 states currently have an estate tax that equals the amount of the state credit, with there being no other state estate or inheritance tax. In these states, the state law refers specifically to the amount allowed as a credit against the federal estate tax. This is commonly referred to as a "pickup" tax. A pickup tax provides revenue to the state but does not increase the federal estate tax payment the heirs must make. Instead, the estate's federal estate tax liability is reduced by the amount of the state tax payment.
Some 15 states also have their own inheritance or estate taxes, a portion of which qualifies as a pickup tax. In all of these 15 states, the state laws specify that if the amount of the state tax is less than the credit allowed against federal taxes, the state tax is increased to the amount of the credit. In cases where the state liability is greater than the credit, federal estate taxpayers receive a credit for the portion of their state tax that equals the maximum allowable credit. Voters in two of these 15 states recently passed measures to repeal inheritance taxes, which will lead these states to rely only on the pickup tax. Another two of the 15 states are phasing out their separate taxes and will rely only on the pickup tax in the future.(1) Table 1 shows the estate and inheritance tax provisions of the states.
The repeal of the federal estate tax would negate a compromise reached between the federal government and the states many years ago when the federal estate tax was first enacted. The federal estate tax was established in the early 1900s. Until that time, the taxation of estates and inheritances was considered the prerogative of the states. States objected to the establishment of a federal estate tax because they felt it infringed on one of their traditional tax bases. As a compromise, Congress included the state credit in the federal tax, thereby guaranteeing states a portion of the estate tax base.
In recent years, a number of states have changed their own estate and inheritance taxes to rely solely on a pickup tax equal to the maximum federal credit. This has left them vulnerable. If the federal estate tax and therefore the federal credit are repealed, the action would repeal automatically the estate taxes of most of these states. Other states that have retained some version of their own estate or inheritance tax are likely to lose some, but not all, of their revenues from this source.
While it could be argued that states could retain this revenue by reinstating a state estate or inheritance tax, in many states, this would be unlikely to occur. It would require the passage of new legislation in each state establishing what would be labeled a new tax. This could be very difficult to accomplish in the current political climate. (As noted, in states with pickup taxes, the pickup tax does not increase the amount of tax levied on an estate but simply shifts some of the revenue from the federal government to the state. If the federal estate tax is repealed, any action by these states to impose an estate tax would likely be attacked as constituting an increase in tax burdens.)
Most States with only a Pickup Tax Would Lose This Revenue if the Federal Estate Tax Were Repealed
In most states with only a "pickup" estate tax that is, an estate tax that is set to equal the amount of the federal credit repeal of the federal estate tax would automatically repeal the state estate tax.(2)
Estate, Inheritance and Gift Tax Provisions as of July 2000
STATE Pickup Tax Only Inheritance + Pickup Tax Estate + Pickup Tax Alabama X Alaska X Arizona X Arkansas X California X Colorado X Connecticut1 X1 Delaware X Florida X Georgia X Hawaii X Idaho X Illinois X Indiana X Iowa X Kansas X Kentucky X Louisiana1 X1 Maine X Maryland X Massachusetts X Michigan X Minnesota X Mississippi X Missouri X Montana2 X2 Nebraska X Nevada X New Hampshire X New Jersey X New Mexico X New York X North Carolina X North Dakota X Ohio X Oklahoma X Oregon X Pennsylvania X Rhode Island X South Carolina X South Dakota3 X3 Tennessee X Texas X Utah X Vermont X Virginia X Washington X West Virginia X Wisconsin X Wyoming X TOTALS 35 13 2 1 Connecticut and Louisiana are phasing out their inheritance taxes.
2 Montana passed a referendum eliminating the inheritance tax for deaths after December 31, 2000.
3 South Dakota passed an initiative eliminating the inheritance tax for deaths after June 30, 2001.
It is difficult to determine precisely the revenue loss to states from the repeal of the federal estate tax. There are no state-specific projections available on the amount of revenue that would be lost to states if the federal estate tax were phased out over a period of time. However, there are data from the IRS on the amount of the state credit for recent years and data from states on their estate and inheritance tax collections. These can be used to estimate the expected magnitude of the revenue loss to states of the repeal of the federal tax.
For states that have only a pickup tax, Table 2 shows two amounts. The first column shows the average annual amount of state taxes credited against the federal estate tax for each state between 1995 and 1997, the most recent years that federal data on the amount of the state credit by state are available. For states with only a pickup tax, this amount is approximately equal to the average annual amount of state estate taxes collected in those years.(3) A three-year average is shown because estate tax revenue at the state level can fluctuate significantly from year to year; in smaller states in particular, the death of one highly wealthy individual can produce unusually high revenues for a single year. (The source of these data are the Statistics of Income bulletin of the Internal Revenue Service.) The second column shows each state's estimate of estate tax collections for state fiscal year 2000. This information, from budget documents and discussions with state revenue officials, provides more recent information on the amount of revenue a state collects in estate taxes. Since these are states that have only a pickup tax, all of these revenues are a result of the state credit on the federal estate tax.
For example, Table 2 shows that Michigan received approximately $80 million a year from the pickup tax from 1995 to 1997. Had the estate tax repeal been in effect in those years, Michigan would have lost approximately $80 million in revenue a year. More recently, estate tax collections have increased in Michigan to an estimated $187 million in fiscal year 2000, all of which would have been lost had the federal estate tax been repealed.
Together, the states relying solely on the pickup tax would have lost $4.4 billion in revenue had the federal estate tax been repealed in fiscal year 2000.(4)
States with Separate Estate or Inheritance Taxes Would Also Lose Substantial Revenue
States that levy their own estate or inheritance taxes in addition to the pickup tax would continue to collect those taxes if the federal tax was repealed. However, as noted above, all these states provide that if the amount of the state tax is less than the credit allowed against federal taxes, the state tax is increased to the amount of the credit. As a result, these states would also lose revenue if the federal estate tax and thus the credit were repealed.
State Revenue from Credit Against the
Federal Estate Tax For State Taxes Paid
(for states with a pickup tax only)
Average Federal Credit, Calendar Years 1995-1997
(millions of dollars)
FY 2000 State Estate Tax Revenues
(millions of dollars)
Alabama $35.6 $68.0* Alaska 1.2 1.8* Arizona 51.7 80.6 Arkansas 54.7 21.6 California 590.6 937.0* Colorado 28.6 65.1 Delaware 11.9 41.0 Florida 429.3 779.1* Georgia 62.7 155.0 Hawaii 16.1 22.8 Idaho 7.2 11.1 Illinois 181.9 360.0* Kansas 32.8 62.9 Maine1 22.1 45.8 Massachusetts 88.3 166.5 Michigan 80.1 187.0* Minnesota 48.3 82.5 Missouri 66.0 132.7 Nevada2 29.7 76.7 New Mexico 11.9 16.1 North Carolina3 67.0 152.7* North Dakota 3.7 6.1 Oregon 34.0 47.8 Rhode Island 9.8 34.2 South Carolina 21.4 42.7 Texas 201.3 249.1 Utah4 14.6 65.1 Vermont 11.7 13.6 Virginia 83.0 165.6* Washington 62.1 86.9 West Virginia 11.9 21.1 Wisconsin 47.3 133.5 Wyoming5 3.6 50.8 Total $2,422.3 $4,382.4
Sources: Average federal credit: Statistics of Income Bulletin, Internal Revenue Service, Summer 1999. FY 2000 Revenues: CBPP survey of state revenue officials.
1. The Maine revenue figure has been adjusted downward by $13 million to correct the effects of one-time accounting changes in fiscal year 2000.
2. Nevada's FY 2000 estate tax revenue was unusually high. The FY 1999 revenue, which is more typical, was 24.2 million dollars.
3. North Carolina's inheritance tax has been repealed, but continued to generate revenue in fiscal year 2000. The number above is the projected revenue for fiscal year 2001, which does not include any inheritance tax revenue.
4. Utah's FY 2000 estate tax revenue was unusually high. The FY 1999 revenue, which is more typical, was 8.9 million dollars.
5. Wyoming's FY 2000 estate tax revenue was unusually high. The projection for fiscal year 2000 was 7.5 million dollars; the actual revenue was the figure given above.
It is more difficult to identify the specific amount of the revenue loss in these states because of the interactions between the state inheritance and estate taxes and the federal credit. Table 3 shows the amount of the state credit against the federal estate tax for each of these states. However, the revenue a state would lose as the result of the repeal of the federal estate tax is less than the total amount of the credit in states with separate taxes. Table 3 also includes estimates of the incremental amount of state revenue raised as a result of the pickup provisions of the estate tax. The latter information was collected through survey of revenue officials in each of these states. If the federal estate tax had been repealed in fiscal year 2000, each state would have lost approximately the amount of revenue shown in the second column of Table 3.
Together, these states with their own estate or inheritance taxes in addition to the pickup tax would have lost approximately $1.1 billion in revenue in fiscal year 2000.
Total State Revenue Loss
The total revenue loss for all states, had the federal estate tax been repealed for fiscal year 2000, would have been approximately $5.5 billion $4.4 billion for the states solely relying on the pickup tax and $1.1 billion for the states using the pickup tax along with their own estate or inheritance taxes.
Estate tax revenues are expected to grow by approximately 60 percent between now and 2010, when estate tax repeal would be fully in effect in the legislation Congress has passed. State pickup tax revenues would likely grow in tandem with the federal revenues. Thus, the revenue loss to states when the repeal would be fully in effect in 2010 would approach $9 billion a year.(5)
Repeal of the Estate Tax Would Benefit the Wealthiest Taxpayers While Reducing the Amount of Revenue for Services for All State Residents
The federal estate tax and thus the state pickup tax that is part of the federal tax is paid solely by the wealthiest two percent of people who die each year.
- In 1997, the estates of fewer than 43,000 people fewer than 1.9 percent of the 2.3 million people who died that year had to pay any estate tax. The Joint Committee on Taxation projects that the percentage of people who die whose estates will be subject to estate tax will remain at about two percent for the foreseeable future. In other words, 98 of every 100 people who die face no estate tax whatsoever.
- To be subject to the federal estate tax, the size of an estate must exceed $675,000 in 2000. The estate tax exemption is rising to $1 million by 2006. The vast bulk of estate taxes are paid on very large estates. In 1997, some 2,400 estates the largest five percent of estates that were of sufficient size to be taxable paid nearly half of all estate taxes. These were estates with assets exceeding $5 million. This means about half of the estate tax was paid by the estates of the wealthiest one of every 1,000 people who died. The average tax cut these estates would receive from repeal of the estate tax would exceed $3 million.
State Revenue from Credit
Against the Federal Estate Tax For State Taxes Paid
(for states with their own inheritance or estate taxes)
Average Federal Credit, Calendar Years 1995-1997
(millions of dollars)
Estimated Revenue from Pickup of Federal Credit, FY 2000
(millions of dollars)
Connecticut $85 $140 Indiana 47 21 Iowa 28 35 Kentucky 41 37 Louisiana 43 50 Maryland 70 78 Mississippi 11 22 Montana 5 8 Nebraska 17 20 New Hampshire 12 25 New Jersey 126 158 New York 418 450 Ohio 132 38 Oklahoma 41 0 Pennsylvania 141 30 South Dakota 3 6 Tennessee 41 11
Sources: Average federal credit: Statistics of Income Bulletin, Internal Revenue Service. FY 2000 revenue: CBPP survey of state revenue officials.
Connecticut - Connecticut is phasing out its inheritance tax. The actual revenue from succession taxes in fiscal year 2000 was $30 million dollars from the estate tax and $198 million dollars from the inheritance tax. The number above is an estimate of the amount of revenue the estate tax would have generated in fiscal year 2000 had the inheritance tax not been in place based on revenue numbers from recent years and the projected fiscal impact of the inheritance tax phase-out.
Louisiana - Louisiana is phasing out its inheritance tax. The actual revenue from inheritance and estate taxes combined was projected to be $79 million in fiscal year 2000. The number above is an estimate of the amount of revenue the estate tax would have generated in fiscal year 2000 had the inheritance tax not been in place based on the 2000 revenue estimates and estimates for the period during which the inheritance tax is being phased out.
Maryland - Maryland's inheritance tax rate is being reduced over the next two years, causing Maryland's estate tax revenue to increase somewhat. In FY 2002, Maryland revenue from the pickup to the federal credit is projected to be $81 million.
Mississippi - Mississippi's non-pickup estate tax has been repealed, but continues to generate a small amount of revenue. The non-pickup estate tax is estimated to have added less than $200,000 to FY 2000 revenue.
Montana - Montana passed a referendum eliminating the non-pickup inheritance tax for deaths after December 31, 2000. The number above is an estimate of the amount of revenue the estate tax would have generated in fiscal year 2000 had the inheritance tax not been in place.
New Jersey - New Jersey's estate tax revenue has fluctuated in recent years. The number above represents the average for fiscal years 1998 through 2000.
New York - New York's estate tax has been repealed, but it continues to generate revenue.The number above is an estimate of the amount of revenue the estate tax would have generated in fiscal year 2000 had the non-pickup estate tax not been in place. It is based on the revenue numbers from recent years and the projected fiscal impact of the non-pickup tax repeal.
Ohio - Ohio's estate tax is being reduced over the next two years, but this reduction is expected to have a minimal effect on pickup tax revenues. Fiscal year 2000 data were not available for Ohio. The number above is from fiscal year 1999.
Oklahoma - Oklahoma's estate tax always exceeds the federal credit.
Pennsylvania - Pennsylvania cut inheritance tax rates in 2000. This cut will increase the amount of revenue that comes from the pickup of the federal credit, but the amount of the increase is unknown.
South Dakota - South Dakota passed an initiative eliminating the non-pickup inheritance tax for deaths after June 30, 2001. The number above is an estimate of the amount of revenue the estate tax would have generated in fiscal year 2000 had the inheritance tax not been in place.
Tennessee - The exemption for Tennessee's separate inheritance tax is scheduled to increase along with the federal exemption. After this increase takes effect, a much higher proportion of Tennessee's estate tax revenue will come from the pickup to the federal credit. By the time the exemption reaches $1million, almost all of Tennessee's estate tax revenue will come from the pickup tax. A state official estimates that when the exemption reaches $1 million, Tennessee will receive approximately $50 to $60 million in revenue from the pickup tax.
As these statistics make clear, the estates of a tiny fraction of the people who die each year those with very large amounts of wealth pay the bulk of all federal estate taxes.
Moreover, a recent Treasury Department study shows that almost no estate tax is paid by middle-income people. Most of the estate taxes are paid on the estates of people who, in addition to having very substantial wealth, still had high incomes around the time they died. The study found that 91 percent of all estate taxes are paid by the estates of people whose annual incomes exceeded $190,000 around the time of their death. Less than one percent of estate taxes are paid by the lowest-income 80 percent of the population, those with incomes below $100,000.
Thus, the elimination of state estate taxes through the repeal of the federal estate tax would benefit the wealthiest taxpayers in the state. At the same time it would reduce the amount of revenue available to finance services for all state residents.
Appendix Table 1
Amount of Credit for State Taxes Paid Against the Federal Estate Tax
(Figures are in thousands of dollars)
STATE CY 1995 CY 1996 CY 1997 Average Alabama 30,025 40,798 35,924 35,582 Alaska 1,718 717 1,075 1,170 Arizona 43,970 43,106 68,024 51,700 Arkansas 25,146 114,065 24,942 54,718 California 479,486 565,750 726,541 590,592 Colorado 23,762 33,402 28,713 28,626 Connecticut 58,555 113,275 82,020 84,617 Delaware 7,730 7,057 20,985 11,924 Florida 360,205 451,137 476,649 429,330 Georgia 62,704 68,912 56,562 62,726 Hawaii 15,727 12,268 20,405 16,133 Idaho 10,004 5,419 6,124 7,182 Illinois 140,624 190,531 214,521 181,892 Indiana 29,406 48,605 61,674 46,562 Iowa 20,581 32,976 31,763 28,440 Kansas 20,815 41,793 35,702 32,770 Kentucky 22,721 34,427 64,520 40,556 Louisiana 50,510 31,666 48,266 43,481 Maine 17,216 10,947 38,100 22,088 Maryland 62,091 73,056 74,459 69,869 Massachusetts 54,780 108,112 102,149 88,347 Michigan 78,632 85,330 76,480 80,147 Minnesota 34,442 54,263 56,050 48,252 Mississippi 12,165 11,183 11,019 11,456 Missouri 37,164 72,098 88,730 65,997 Montana 3,957 6,284 4,900 5,047 Nebraska 16,154 18,632 17,228 17,338 Nevada 39,628 25,190 24,419 29,746 New Hampshire 6,456 14,604 15,719 12,260 New Jersey 99,791 125,748 151,775 125,771 New Mexico 8,627 14,368 12,724 11,906 New York 355,515 398,672 499,702 417,963 North Carolina 80,230 57,449 63,243 66,974 North Dakota 4,139 3,574 3,522 3,745 Ohio 112,580 145,174 139,688 132,481 Oklahoma 41,599 49,079 32,834 41,171 Oregon 33,099 32,098 36,685 33,961 Pennsylvania 114,320 133,466 174,767 140,851 Rhode Island 7,309 6,959 15,264 9,844 South Carolina 17,653 20,287 26,275 21,405 South Dakota 1,309 4,129 4,385 3,274 Tennessee 24,942 52,328 46,567 41,279 Texas 162,303 171,964 269,653 201,307 Utah 25,296 7,395 10,976 14,556 Vermont 2,846 17,737 14,482 11,688 Virginia 78,859 61,065 109,085 83,003 Washington 29,406 68,029 88,977 62,137 West Virginia 8,757 14,531 12,377 11,888 Wisconsin 21,408 48,327 72,303 47,346 Wyoming 6,588 1,885 2,377 3,617 Total 3,002,950 3,749,867 4,301,324 3,684,714 Source: Statistics of Income Bulletin, Internal Revenue Service, Summer 1999.
1. In addition to state estate and inheritance taxes, four states Connecticut, Louisiana, North Carolina and Tennessee levy taxes on gifts of money or property that exceed a specific level. These state gift taxes do not affect the revenue collected from the state's pickup of the federal estate tax and would not be affected by the repeal of the federal estate tax.
2. Among the states with only a pickup tax, there are a few exceptions such as Virginia and the District of Columbia where the state estate tax statute refers to the federal estate tax law as of a particular date. In these states, the amount of state estate tax owed would be calculated based on the amount of the federal credit prior to its repeal. However, even in these states, the intent of the state estate taxes appears to be the same as in the other pickup tax states. In addition, in order to continue collecting this tax, these states would have to take over the administration of the tax and require estates to file a form similar to the current federal form. As a result, there is a strong likelihood that these states would act to repeal their estate taxes when the pickup taxes in other states were eliminated.
3. Note that state data on estate tax collections may not match IRS data because of different fiscal years and because the timing of state and federal estate tax payments may vary for the same estate.
4. As Table 2 shows, the amount of revenue that states collect through the pickup tax has increased significantly in recent years as federal estate tax collections have grown. Revenues from the federal estate and gift taxes are projected to increase from an average of $17.2 billion from 1995 to 1997 to $30 billion in 2000.
5. Both the federal and state revenue projections included here present growth in nominal terms that is, they are not adjusted for inflation.