Assessing the Impact of State Estate Taxes

Publication Date: February 2004

Publisher: Center on Budget and Policy Priorities (Washington, D.C.)

Author(s): Elizabeth C. McNichol

Research Area: Banking and finance

Keywords: State taxes; Income diversity; Household income; Economic inequality

Type: Report

Abstract:

In June 2001, President Bush signed federal legislation to phase out the federal estate tax. This legislation repeals the federal estate tax by 2010 and also effectively repealed by 2005 the state “pickup” taxes through which states share in federal estate tax collections. States can prevent this loss of revenue by “decoupling” from the federal change and, as of December 2006, 17 states plus the District of Columbia were decoupled from the federal changes.

There have been a number of reports concerning the impact of state estate taxes in states that have decoupled from the federal changes. This is a complicated topic; the effect on individual estates varies over time and is very dependent on the size of a person’s estate. If examined out of context, the effects of maintaining a state estate tax can be significantly overstated and lead one to erroneous conclusions.

For example, some reports suggest that people — especially elderly people — should be very concerned about where they live because of the potential impact of state taxes on their ability to pass along accumulated savings and property to their heirs. In fact, however, the vast majority of people are unaffected by these taxes. For those whose estates are large enough to be affected, the difference between living in a state with or without an estate tax can be small. Other reports give the impression that estate taxes are increasing rather than declining over time in states that have retained their state estate tax. This also is incorrect. This report addresses some facts about state estate taxes that will help put their actual impact in perspective.