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P.L. 107-16, the Economic Growth and Tax Relief Reconciliation Act of 2001, repeals the federal
estate tax for decedents that die in 2010. In addition, the act repealed the credit for state estate
taxes for decedents dying after December 31, 2004, and replaces the credit with a deduction. In
most states, the repeal of the tax and the significant increase in the federal exclusion will also
repeal or diminish state estate, inheritance, and gift taxes. Some state budgets depend on the
estate tax more than others. As a percentage of total tax revenue collected from FY1977 to
FY2005, state estate tax contributions ranged from 0.40% in New Mexico to 3.31% in New
Hampshire. When the federal “credit for state death taxes” changed to a deduction (in 2005), 26
states, including Alaska and New Hampshire, no longer levied estate taxes. In the 110th Congress,
H.R. 411 would repeal the sunset for estate tax repeal. The Administration’s FY2008 budget
proposes repealing estate tax permanently. Repeal of the sunset would also retain other
modifications to the valuation of assets at death implemented by EGTRRA. This report will be
updated as events warrant.
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Overview ................................................................................................................................... 1
Changes under the Economic Growth and Tax Relief Reconciliation Act of 2001
(EGTRRA)....................................................................................................................... 1
State Estate and Gift Tax Revenue ............................................................................................ 2
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Table 1. State Estate and Gift Tax Revenue: Average for 1977 to 2005.......................................... 3
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Author Contact Information ............................................................................................................ 5
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he federal estate tax will be repealed gradually by the Economic Growth and Tax Relief
Reconciliation Act of 2001 (EGTRRA). Repeal of the federal estate tax and increase of the
T exclusion amount (or its credit equivalent) as prescribed by EGTRRA will also repeal or
diminish most state estate, inheritance, and gift taxes.1 In FY2005, state estate and gift tax
revenue was 0.82% of total state tax revenue, but there was considerable variation among the
states.2 This report will briefly describe the federal credit for state estate taxes and provide data on
the relative importance of estate, inheritance, and gift taxes to each state and the District of
Columbia.
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The federal credit for state estate taxes first appeared in the Revenue Act of 1924, some eight
years after the introduction of the federal estate tax. The 1924 act stipulated that estates could
claim a credit for state estate taxes up to 25% of the federal estate tax liability. After numerous
modifications since its introduction, the federal credit was a schedule of 21 gradually increasing
rates beginning at 0% and eventually reaching 16%. The rates were levied on the value of the net
federal estate less a $60,000 exemption (the remainder was called the adjusted taxable estate).
The top credit rate of 16% applied to adjusted taxable estate values over $10,040,000.
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Because many state tax codes are linked directly to federal tax code, changes in federal law also
affect the state tax codes. Two parts of EGTRRA affect the tax revenue generated by state estate
taxes. First, EGTRRA phased out the federal credit for state death taxes for deaths occurring
before January 1, 2005, and replaced it with a deduction beginning in 2005. The phase-out began
in 2002 when the credit was reduced by 25%; by 50% in 2003; and by 75% in 2004. When estates
began deducting state estate taxes, the value of the deduction (in terms of reduced tax liability) is
the top marginal federal estate tax rate (45% in 2007) multiplied by state estate taxes paid. In
contrast, before EGTRRA, the value of the credit was 100%, or it reduced federal tax liability
dollar-for-dollar. Thus, after EGTRRA, state estate taxes impose a “real” tax liability or burden.
In addition, the applicable exclusion amount for federal estate taxes has increased to $2 million.
The increase in the applicable exclusion amount is important to many states because it also serves
as the filing threshold for the federal estate tax. Some states require estates to file a state return
only when a federal return is required. If fewer federal estate tax returns are filed then fewer state
estate tax returns would be filed.
States could avoid losing revenue by decoupling from the federal tax code, as some have since
EGTRRA became law. However, the changes enacted by EGTRRA will necessarily create state
estate tax burdens if states decouple from the federal tax code and collect estate tax revenue. If
repeal of the federal estate tax is made permanent, the estates of those dying in states with a free
standing estate tax would still pay state estate taxes. According to a recent survey, 24 states and
1 For the remainder of the report, all state taxes that are triggered by death will be referred to as “state estate taxes.”
“State estate taxes,” thus include state inheritance taxes, succession taxes, and estate taxes.
2 U.S. Census Bureau, Governments Division, State Government Tax Collections, website http://www.census.gov/govs/
www/statetax05.html, visited May 4, 2006.
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DC would have had a freestanding estate or inheritance tax in 2006 (see Table 1).3 The next
section provides data on state estate tax revenue as reported by the U.S. Census Bureau. The
contribution of the estate tax to a state’s finances likely influenced the decoupling decision. The
more reliant states are less likely to repeal the tax.
For more information on the federal estate tax and the credit equivalent, see CRS Report
RL30600, Estate and Gift Taxes: Economic Issues, by Donald J. Marples and Jane G. Gravelle.
For more on current estate and gift tax law, see CRS Report 95-416, Federal Estate, Gift, and
Generation-Skipping Taxes: A Description of Current Law, by John R. Luckey.
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Before 2005, states imposed death-triggered taxes in one of two ways. Most states and the
District of Columbia picked up the federal credit for state estate taxes as described above. Others
collected an independent inheritance (or succession tax) and in most cases imposed an additional
estate tax to absorb any remaining federal credit. The following explanation of the Florida estate
tax, which was an exclusively “pick up” state before EGTRRA, appeared on the Florida
Department of Taxation official website in 2006:4
Florida’s estate tax system is commonly referred to as a “pick up” tax. Florida picks up all or
a portion of the credit for state death taxes allowed by the federal government. Under this
system, Florida estate tax is not due unless an estate is required to file a federal estate tax
return.
In states with estate tax laws similar to Florida’s, the state estate tax was repealed when the
federal credit was repealed in 2005. In contrast, the states that impose an independent estate tax
will lose only the portion of their estate tax that relies on the existence of the federal credit.
For example, Pennsylvania maintains an inheritance tax which is applied with graduated rates and
depends on the relationship of the heir to the decedent (lower rates for closer relatives), not the
federal estate tax. Pennsylvania describes the inheritance tax on its official website:5
The inheritance tax is imposed on the value of the decedent’s estate transferred to
beneficiaries by will or intestacy. Certain inter vivos transfers are also subject to inheritance
tax. A fractional portion of property held by the decedent and one or more other persons
jointly with the right of survivorship is taxable in the decedent’s estate. Specified deductions
may be taken in determining taxable estate value. Inheritance tax is calculated at a
percentage of the value of the assets transferred which is determined by the relationship of
the heir to the decedent and the decedent’s date of death.
When the estate tax is repealed, taxpayers in the states like Pennsylvania with stand-alone estate
taxes would lose the federal credit along with the federal liability. However, the state inheritance
tax would still generate state tax revenue. Because of this, political pressure to repeal state
inheritance taxes upon repeal of the federal estate tax might be greatest in states with an
independent inheritance tax like Pennsylvania’s. States with laws similar to Pennsylvania’s and
3 Joel Michael, “State Estate, Inheritance, and Gift Taxes Five Years After EGTRRA,” State Tax Notes, Dec. 25, 2006,
pp. 871-890.
4 The citation is from http://sun6.dms.state.fl.us/dor/taxes/estate_tax.html, site visited May 4, 2006.
5 The site is http://www.revenue.state.pa.us/revenue/cwp/view.asp?A=3&Q=205803, visited May 4, 2006.
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states that link to the federal tax code as it existed on a specific date (most often a date predating
passage of EGTRRA) are identified in Table 1 with a “yes” in one of the columns reporting the
existence of state estate taxes in 2006. The “PU” column is marked yes if the state tax is based on
the old “pick-up” tax as applied under the old federal tax credit. The “I” column is marked yes if
the state has a free-standing inheritance tax. And, the column “E” is marked yes if the state
imposes a free-standing estate tax.
Table 1. State Estate and Gift Tax Revenue: Average for 1977 to 2005
Estate and Gift Taxes Taxa in 2006
Revenue from Estate and
Reliance on
State
Gift Tax 1977 to 2005
as % of Total Tax
Estate and Gift
Average (in $000s)
Revenue 1977 to
2005 Average
PU I E Taxes Rank
Alabama 25,380 0.54%
no
no
no
43
Alaska 1,347 0.10%
no
no
no
50
Arizona 37,357 0.69%
no
no
no
35
Arkansas 18,154 0.55%
no
no
no
41
California 506,317
1.26%
no
no
no
19
Colorado 33,204 0.93%
no
no
no
28
Connecticut 168,949
3.11%
yes
no
yes
2
Delaware 21,221 1.66%
no
no
no
10
Dist. of
34,910 1.23%
yes
no
no
n/a
Columbiab
Florida 302,099 1.82%
no
no
no
9
Georgia 51,007 0.59%
no
no
no
40
Hawaii 12,445 0.53%
no
no
no
44
Idaho 7,403 0.55%
no
no
no
42
Illinois 172,153 1.26%
yes
no
no
18
Indiana 87,303 1.30%
no
yes
no
14
Iowa 68,752 2.17%
no
yes
no
6
Kansas 46,883 1.64%
yes
no
yes
11
Kentucky 60,716 1.27%
no
yes
no
16
Louisiana 48,675 1.07%
no
no
no
25
Maine 18,401 1.23%
yes
no
no
21
Maryland 82,286 1.11%
yes
yes
yes
24
Massachusetts 183,894
2.03%
yes
no
yes
7
Michigan 96,350 0.78%
no
no
no
33
Minnesota 41,924
0.59%
yes
no
no
39
Mississippi 13,197
0.47%
no
no
no
47
Missouri 56,270 1.04%
no
no
no
26
Montana 10,726 1.24%
no
no
no
20
Nebraska 9,744 0.50%
yes
yes
yes
46
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Estate and Gift Taxes Taxa in 2006
Revenue from Estate and
Reliance on
State
Gift Tax 1977 to 2005
as % of Total Tax
Estate and Gift
Average (in $000s)
Revenue 1977 to
2005 Average
PU I E Taxes Rank
Nevada 17,446 0.60%
no
no
no
38
New
26,790 3.31%
no
no
no
1
Hampshire
New Jersey
267,247
2.30%
yes yes no
5
New Mexico
9,511
0.40%
no no no
49
New York
563,034
1.86%
yes no no
8
North
98,132 1.16%
yes
no
no
22
Carolina
North Dakota
3,540
0.50%
no no no
45
Ohio 73,185 0.63%
no
no
yes
37
Oklahoma 55,982
1.48%
yes
no
yes
13
Oregon 35,523 1.27%
yes
no
yes
17
Pennsylvania 472,788
3.10%
no
yes
no
3
Rhode Island
18,159
1.50%
yes no yes
12
South Carolina
28,073
0.72%
no no no
34
South Dakota
15,825
2.75%
no no no
4
Tennessee 55,658
1.28%
no
yes
no
15
Texas 156,716 0.98%
no
no
no
27
Utah 10,451 0.43%
no
no
no
48
Vermont 7,880 0.88%
yes
no
no
30
Virginia 69,479 0.87%
yes
no
no
31
Washington 53,428
0.82%
yes
no
yes
32
West Virginia
13,008
0.65%
no no no
36
Wisconsin 73,519
1.13%
yes
no
no
23
Wyoming 6,883 0.88%
no
no
no
29
Total by Type of Tax 19 8
6
Sources: U.S. Bureau of Census, State Government Tax Collections: 1977-2005; Joel Michael, “State Estate,
Inheritance, and Gift Taxes Five Years After EGTRRA,” State Tax Notes, Dec. 25, 2006, pp. 871-890.; and
author’s calculations.
a. “PU” is a tax based on the “pick-up” derived from the expired federal credit; “I” is an free standing
inheritance tax; and “E” is a free standing estate tax.
b. The District of Columbia tax data are from its FY2000 and FY2005 proposed budgets and represent the
average for 1990 through 2005. The FY2005 revenue is estimated. If DC were a state, it would have been
approximately 21st on the reliance index.
In addition to providing information about the existence of the state estate tax in 2006, Table 1
also provides data on the relative importance of estate and gift taxes to each state using the
average tax revenue generated by state estate taxes from FY1977 to FY2005. The average annual
revenue over 29 years is provided because state estate tax revenue fluctuates significantly from
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year to year. The 1977 fiscal year was chosen as the first year in the series because the current
federal estate tax structure is significantly dissimilar from the pre-1977 tax.. The fluctuation is
greatest in less populated states where the death of one very wealthy resident would significantly
affect revenue collected. The final column in Table 1 reports the relative rank of states based
upon their reliance on state estate and gift taxes over this 29-year time period.
In addition to year-to-year fluctuations within states, there is considerable variation among the
states in proportion of the total state tax revenue accounted for by the estate tax. In Alaska, the
pick-up estate tax amounted to only 0.10% of tax revenues. In New Hampshire, on the other
hand, the state’s now repealed estate tax contributed 3.31% of the state’s total tax revenues.
The anticipated revenue loss generated by repeal of the federal estate tax could be approximated
by the average revenue collected in the states over the FY1977 to FY2005 time frame. In contrast,
the estate and gift tax revenue collected in states with an independent estate tax would not
accurately predict the potential revenue loss from repeal or reform of the federal estate tax.
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Steven Maguire
Specialist in Public Finance
smaguire@crs.loc.gov, 7-7841
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