State Responses to Estate Tax Changes Enacted as Part of the
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)

[more detail] [summary table]

 


B-23/02
October 24, 2002

State Responses to Estate Tax Changes Enacted as Part of the
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)

Summary

The Economic Growth and Tax Relief Reconciliation Act of 2001 phases out the state death tax credit allowed against the federal estate tax in 25 percent increments between 2002 and 2005. This bulletin presents the results of a survey regarding legislative action taken in 2002 to offset the impact of EGTRRA on state death taxes. The survey findings are: (1) Prior to EGTRRA, 38 states relied on solely on a pick-up estate tax, i.e., a state estate tax equal to the maximum state death tax credit allowed under federal law. In all but four states the conformity to the federal code was on an automatic or rolling basis. (2) The other 13 states had a free-standing state death tax, but incorporated the state death tax credit as either a minimum tax or supplemental tax; (3) Twelve states took legislative action of offset some or all of the revenue impact of EGTRRA; (4) Under current state law, there will be 30 states that have no state death tax in 2005, when the federal law phases-out fully the state death tax credit; (5) The state revenue impact of the phase-out of the death tax credit exceeds $4.0 billion annually. Survey results are discussed further below and presented in the attached table.

 

Background
1. The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) repeals the federal estate tax effective in 2010. Between 2002 and 2010, EGTRRA also reduces the estate tax rates somewhat and increases the exemption level for the tax. In addition, EGTRRA provides that the amount of state death tax credit that may be taken against the federal estate tax is reduced by 25 percent for deaths occurring in 2002, 50 percent for deaths in 2003, 75 percent for deaths in 2004 and by 100 percent for deaths occurring in 2005 and thereafter. Beginning in 2005, a deduction is allowed for state death taxes paid in computing the taxable estate for federal purposes.

2. The state death tax credit had been a permanent feature of the federal estate tax since it was enacted in 1926. When enacted, it was intended to reduce federal revenues and to place a floor under state death taxes to reduce interstate tax competition. The rates of the credit (maximum of 16 percent) have been unchanged since 1926 when they were set at an amount equal to 80 percent of the federal tax rates.

3. The effect of the death tax credit phase-out, of course, is to reduce state revenues in cases where the state death tax is tied on an automatic basis to the federal death tax credit and there is no countervailing legislative action taken. This is true regardless of whether the state relies on the pick-up tax as its only death tax or as a supplemental tax (in which case the entire tax will phase-out) or uses the pick-up tax as a minimum tax (in which case, the state will lose revenue in those cases where the death tax credit available exceeded the tax under the state stand-alone tax).

4. The effect of the phase-out was also to transfer revenue from states to the federal government during the period of the phase-out, thus allowing greater federal tax reductions than would otherwise have been possible.

Pre-EGTRRA State Death Taxes
5. Since its enactment in 1926, all states and the District of Columbia have taken steps to coordinate their state death taxes in some fashion with the state death tax credit. Prior to the enactment of EGTRRA in 2001, 37 states and D.C. relied solely on a "pick-up tax" in which the state death tax was simply an amount equal to the maximum amount of state death tax credit allowed under federal law. In five states (New York, North Carolina, Oregon, Virginia and Washington), the state pick-up tax was tied to the federal estate tax as of a particular date prior to the enactment of EGTRRA. In the remaining cases, the state pick-up tax was tied to the federal code on an automatic or rolling basis, meaning that the pick-up tax would phase-out in these states unless the state enacted legislation to the contrary.

6. The remaining 13 states -- Connecticut, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, New Hampshire, New Jersey, Ohio, Oklahoma, Pennsylvania and Tennessee -- also coordinated their death taxes (a stand-alone inheritance or estate tax) with the state death tax credit. In these states, the state death tax credit acted as a minimum tax for the stand-alone tax (i.e., the estate was liable for the greater of the death tax credit or the separately computed state tax) or as a supplemental state death tax (i.e., an amount equal to the allowable death tax credit was owed in addition to a state-computed liability). Of these thirteen states, all except Kansas were tied to the federal code on an automatic or rolling basis prior to the enactment of EGTRRA. In addition, Ohio takes the position that its incorporation of the state death tax credit into its estate tax is not affected by the passage of EGTRRA.

 

Post-EGTRRA Legislative Action
7. Since the enactment of EGTRRA, 12 states have taken legislative action to offset all or a part of the impact of the death tax credit phase-out. This includes nine states (D.C., Maine, Massachusetts, Minnesota, Nebraska, North Carolina, Rhode Island, Vermont and Wisconsin that took legislative action to preserve their pick-up tax. In addition, Maryland, New Jersey and Pennsylvania enacted legislation to tie their use of the death tax credit as a supplemental or minimum tax to the death tax credit as it existed prior to the passage of EGTRRA.

8. In most cases, the legislative change was accomplished simply by conforming the state law references to the state death tax credit to the federal law at some point prior to the passage of EGTRRA. There were three exceptions:

9. In Oregon where the pick-up tax is tied to the federal code as April 28, 1997, the legislature passed a law that would adopt the federal exemption amounts for 2002-2004, but phase out the pick-up tax in 2005. Governor Kitzhaber has not yet signed or vetoed this legislation. Similarly, New Hampshire repealed its separate inheritance tax effective in 2003.

10. If there is no further state legislative action between now and 2005 (when the federal allowance of a state death tax credit is terminated), there will be at that time 10 states with a straight pick-up tax:

D.C.
Massachusetts
Minnesota
Nebraska
New York
Rhode Island
Vermont
Virginia
Washington
Wisconsin
   

There will be five states -- Kansas, Maryland, New Jersey, Ohio and Pennsylvania -- that have a stand-alone state death tax that incorporates the death tax credit (with a fixed conformity date) as a minimum tax or a supplemental tax. There will also be 6 other states -- Connecticut, Indiana, Iowa, Kentucky, Oklahoma and Tennessee -- that have a stand-alone state death tax that does not include any reference to the state death tax credit, although the Connecticut succession tax will be repealed fully in 2006.

The remaining 30 states will have no death tax in place at that time (including Louisiana where a separate state death tax is scheduled to expire in 2004, Maine and North Carolina where the decoupling legislation is effective only for deaths occurring prior to 2003 and 2004, respectively, New Hampshire which repealed its separate inheritance tax effective for deaths occurring in 2003, and Oregon unless the governor vetoes a measure passed in 2002 that will phase-out the pick-up tax in 2005.)

Revenue Effects
11. When enacted, it was estimated that the phase-out of the death tax credit could reduce state revenues by $19-$23 billion between FY 2003 and 2007, unless states took contrary state legislative action. In FY 2001, state death taxes of all types amounted to $7.5 billion. Equally as frustrating to states as the revenue loss was the fact that it came with no consultation and at a time when state (and federal) revenues were beginning to show the effects of a slowing economy.

12. The FTA survey of states indicates that states that do not tie their relationship to the state death tax credit as of a fixed date will see their revenues reduced by about $4.2 billion on an annual basis in FY 2007 when the effects of the phase-out should be fully reflected. In addition, it is likely that the state legislative actions noted above have offset an additional $0.5 billion in revenue reductions. The FY 2004 (next budget cycle) costs of the EGTRRA phase-out will be roughly $2.1 billion. The FY 2003-2007 costs will total about $13-$14 billion.

Harley Duncan
harley.duncan@taxadmin.org

 


State Death Taxes After the Passage of
The Economic Growth and Tax Relief Reconciliation Act of 2001
 
 
 
 
Type of Tax/
Relationship to
Federal Credit
 
State Law
Change Passed
 
     
Fiscal Impact ($ Millions)
State
     
FY 2003
FY 2004
FY 2007
           
Alabama
Pick-up/Auto
No
-$20.0
-$33.0
-$48.0
Alaska
Pick-up/Auto
No
-$0.3
-$1.0
-$3.0
Arizona
Pick-up/Auto
No
-$18.8
-$38.1
-$73.0
Arkansas
Pick-up/Auto
No
-$4.7
-$10.9
-$25.0
California
Pick-up/Auto
No
-$386.5
-$762.2
-$1,300.0
Colorado
Pick-up/Auto
No
-$14.3
-$35.7
-$73.7
Connecticut
Stand-alone/Auto*
No
NA
NA
NA
Delaware
Pick-up/Auto
No
-$7.6
-$16.3
-$34.7
District of Columbia
Pick-up/Fixed*
Yes
-
-
Florida
Pick-up/Auto
No
-$153.2
-$361.6
-$930.3
Georgia
Pick-up/Auto
No
-$24.0
-$56.0
-$129.0
Hawaii
Pick-up/Auto
No
-$9.0
-$14.1
-$24.2
Idaho
Pick-up/Auto
No
-$2.0
-$2.0
-$2.0
Illinois
Pick-up/Auto
No
-$150.0
-$250.0
-$400.0
Indiana
Stand-alone/Auto
No
-$7.4
-$17.6
-$21.4
Iowa
Stand-alone/Auto
No
-$15.2
-$26.1
-$45.6
Kansas
Stand-alone/Fixed*
No
-
-
-
Kentucky
Stand-alone/Auto
No
-$11.3
-$23.4
-$55.8
Louisiana
Stand-alone/Auto*
No
-$5.4
-$11.5
-$24.0
Maine
Pick-up/Auto*
Yes*
-$3.6
-$16.2
-$32.3
Maryland
Stand-alone/Fixed*
Yes
-
-
-
Massachusetts
Pick-up/Fixed*
Yes
-
-
-
Michigan
Pick-up/Auto
No
-$67.0
-$99.6
-$155.0
Minnesota
Pick-up/Fixed*
Yes
-
-
-
Mississippi
Pick-up/Auto
No
-$13.0
-$20.0
-$30.0
Missouri
Pick-up/Auto
No
-$30.0
-$72.0
-$182.0
Montana
Pick-up/Auto
No
-$0.9
-$2.7
-$3.9
Nebraska
Pick-up/Fixed*
Yes*
-
-
-
Nevada
Pick-up/Auto
No
-$14.0
-$23.0
-$39.0
New Hampshire
Stand-alone/Auto*
No
-$7.0
-$9.4
-$31.0
New Jersey
Stand-alone/Fixed*
Yes
-
-
-
New Mexico
Pick-up/Auto
No
-$7.5
-$12.0
-$20.0
New York
Pick-up/Fixed*
No
-
-
-
North Carolina
Pick-up/Fixed*
Yes*
-
-
-$129.0
North Dakota
Pick-up/Auto
No
-$0.2
-$1.5
-$5.5
Ohio
Stand-alone*
No
-
-
-
Oklahoma
Stand-alone/Auto
No
-$4.6
-$10.3
-$11.5
Oregon
Pick-up/Fixed*
No
-
-
-$46.0
Pennsylvania
Stand-alone/Fixed*
Yes
-
-
-
Rhode Island
Pick-up/Fixed*
Yes
-
-
-
South Carolina
Pick-up/Auto
No
-$12.0
-$24.0
-$48.0
South Dakota
Pick-up/Auto
No
NA
NA
NA
Tennessee
Stand-alone/Auto
No
-$4.5
-$8.3
-$16.6
Texas
Pick-up/Auto
No
-$81.0
-$159.0
-$253.0
Utah
Pick-up/Auto
No
-$3.0
-$8.0
-$16.0
Vermont
Pick-up/Fixed*
Yes*
-
-
-
Virginia
Pick-up/Fixed*
No
-
-
-
Washington
Pick-up/Fixed*
No
-
-
-
West Virginia
Pick-up/Auto
No
-$5.0
-$9.0
-$16.0
Wisconsin
Pick-up/Fixed*
Yes*
-$29.0
-
-
Wyoming
Pick-up/Auto
No
-$5.1
-$7.7
-$10.3
Total
-$1,117.1
-$2,142.2
-$4,234.8
Definitions:
 
 
 
Pick-up:
State has death tax equal to the state death tax credit provided for under federal estate tax.
Stand-alone:
State has a free-standing death tax (inheritance or estate) and uses the death tax credit provided for under federal law as either a minimum tax or a supplemental additional tax to the state law tax.
 
Auto:
State conforms to the provisions of the state death tax credit on an automatic or rolling basis.
Fixed:
State conforms to the provisions of the state death tax credit as of a fixed date prior to the enactment of EGTRRA.
Notes:
Connecticut
Connecicut had earlier passed legislation to repeal its separate succession tax and move solely to a pick-up tax in 2006.
No legislative changes were made in 2002; the pick-up tax will expire for deaths occurring after 1/1/2005.
D.C.
D.C. passed legislation in July 2002 to provide that the pick-up tax will be equal to the amount computed under the state death tax credit as it existed on January 1, 2001.
Kansas
Kansas has an estate tax and a succession tax; they are separate taxes that are not alternative minimums. The estate tax is equal to the state death tax credit allowed under federal law as of 12/31/1997 without regard to the EGTRRA phase-out.
Louisiana
Under prior state law, Louisiana was transitioning to a pure pick-up tax. The state inheritance tax will expire for deaths occurring after June 30, 2004; the pick-up tax will expire for deaths after12/31/2004. The revenue impacts reflect only the phase-out of the pick-up tax.
Maine
For deaths occurring in 2002, the Maine tax is equal to the state death tax credit allowed as of 12/31/2001. In subsequent years, the Maine tax is equal to the credit allowed under federal law; it will phase-out barring further legislation.
Maryland
Maryland passed legislation in 2002 to tie the pick-up tax to the state death tax credit as it existed prior to 1/1/2001.
Maryland also imposes an inheritance tax on non-lineal heirs.
Massachusetts
Massachusetts passed legislation in 2002 providing that the state tax is the credit computed under the federal law as of December 31, 2000. The new law is unclear on the treatment of the new federal exemption levels. Corrective legislation is under consideration.
Minnesota
Minnesota law provides that the state pick-up tax is tied to the federal estate tax as of 12/31/2000. Legislation passed in 2002 to clarify this intent.
Nebraska
Nebraska converted its pick-up tax to a separate estate tax with a rate schedule identical to the rate schedule of the state death tax credit as it existed on 12/31/2001. The rate applies to the adjusted estate minus $1 million.
New Hampshire
New Hampshire also imposes an 18 percent inheritance tax on non-lineal heirs. Legislation was passed in 2002 to repeal the inheritance tax for deaths occurring after January 1, 2003. Revenue impacts are for the pick-up tax only.
New Jersey
New Jersey has both an inheritance tax and an estate tax. Legislation passed passed in 2002 provides that the estate tax is equal to the credit allowed as of 12/31/01.
New York
The New York estate tax is tied to the federal estate tax and death tax credit as in effect in July 1998.
North Carolina
Legislation passed in 2002 ties the state pick-up tax to the federal code as of May 7, 2002 except that the amount of the state pick-up tax is to be computed without regard to the phase-out of the death tax credit. For deaths occurring on or after 1/1/2004, however, the state pick-up tax will be equal to the state death tax credit allowed under federal law as of the date of death.
Ohio
Ohio has a stand-alone estate tax. Where the state death tax credit exceeds the Ohio liability, the amount of the death tax credit is owed; Ohio takes the position that this provision is not affected by the phase-out contained in EGTRRA.
 
Oregon
The Oregon pick-up tax is tied to the federal estate tax as of April 28, 1997. Legislation passed in 2002 would adopt the federal exemption amounts for 2002-2004 (but not the phase-out) and would repeal the tax for deaths occurring in 2005 and after. As of this writing, the Governor has neither signed nor vetoed the bill.
Pennsylvania
Pennsylvania enacted in legislation in 2002 to tie the state estate tax to the federal death tax credit as iof 6/1/2001.
Rhode Island
Passed legislation in 2002 providing that state death tax is equal to the amuont available under state death tax credit as it existed on 12/31/2001.
Vermont
Legislation passed in 2002 conform state law references to the state death tax credit as in effect on 1/1/2001. The law, however, incorporated all other estate tax features of EGTRRA, including the higher exemption amounts.
Virginia
Prior Virginia law tied the state estate tax to the death tax credit as it existed on Jan. 1, 1978.
Washington
Prior Washington law tied the pick-up tax to the death tax credit in effect on Jan. 1, 2001.
Wisconsin
Legislation passed in 2001 provides that for deaths occuring from 10/1/2002 through 12/31/2007, the state pick-up tax is computed under federal law in effect on 12/31/2000. Effective for deaths occurring after 12/31/2007, the state tax is tied to federal law in effect at that time.