States and the Estate Tax

Here are some excerpts from Deborah Brewsterin, States aim to keep estate tax despite federal abolition plan, Financial Times, Nov. 8, 2005:

Close to 20 states have begun legislating to collect a state estate tax in place of the federal tax, which is currently 47 per cent but is being phased out and is due to disappear in 2010. Other states also have plans to introduce the levy.  * * *

Most states have an estate tax already, but it is legally coupled with the federal tax. When a person dies the tax levied on their estate is collected by the federal government, which returns a portion of it to the state. However, under this coupling arrangement the states cannot levy the tax independently. To do so, they have to legislate for a new tax. From January 1 this year the estate tax was decoupled, making the matter more urgent.

Kevin Ruth, the head of wealth planning for UBS in the US, said: “Seventeen states and the District of Columbia have started to try and create their own [estate taxes] to make up for the loss of revenue when the federal tax goes.”

However, he said that in several states that had introduced the estate tax, taxpayers had successfully challenged the law, forcing the states to go back to the legislative drawing board.

“Taxpayers have challenged in Pennsylvania, New Jersey and Washington State,” said Mr Ruth. The challenges were on several different grounds. Pennsylvania, for example, has a constitutional rule that it cannot introduce progressive taxation, which the estate tax was. Pennsylvania might have to change its constitution if it wants to reintroduce the estate tax.

Special thanks to David S. Luber for referring me to this article.