Estate tax may be back, good news for states

A member of College Republicans National Committee dresses as Grim Reaper as he marches on Capitol Hill to call on the Senate to eliminate the death tax June 8, 2006 in Washington, D.C.

If we do go over the fiscal cliff in a few days, not everyone will be screaming in terror on the way down. Some state governments could actually benefit from the sudden changes to the tax code if we take the plunge. Specifically, changes to the way the federal government taxes large estates -- wealth passed on by inheritance. As it stands now, all that money goes to the federal government. But that could all change in a few days.

Up until 2001, state governments got a share of the 55 percent tax the federal government collected on large estates. But in 2001, President George W. Bush's tax cuts went into effect. States no longer got a piece of a smaller estate tax pie.

"It hit the states at a particular inopportune time" says Francis Norton, a senior research associate at the Urban-Brookings Tax Policy Center. He says it has taken 10 years for states to adjust to the new policy. Now, going over the fiscal cliff could reverse that loss.

If the Bush-era tax policy expires, the tax rates on large estates would go up and states would again be eligible for a share of the tax -- up to $3 billion in new revenue. One state, California, has already written $45 million in estate taxes into its budget.

Ed McCaffery teaches law and economics at the University of Southern California. He says, "that's a big assumption." For one, that $45 million estimate assumes that everyone who is eligible to pay their estate tax will. "The estate tax is a very avoidable tax. It's like a game of hot potato. The way to get out of the estate tax is to not die with money in your accounts. Get rid of that hot potato" by, for example, setting up a trust.

If the Bush-era tax cuts expire, it also means the estate tax would apply to smaller estates -- anything above $1 million -- and the tax rate would jump back to 55 percent. That could affect not just the wealthiest Americans, but those considered upper-middle class as well.

About the author

David Weinberg is a general assignment reporter at Marketplace.

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