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Estate Tax Decoupling

As a result of a change in federal estate tax law, states have lost billions of dollars in tax revenues.
In 2001, Congress enacted a sweeping tax reduction law that includes a phaseout of the federal estate tax, culminating in a full repeal in 2010. On a much faster track, the law repealed the federal estate tax credit—this phaseout was completed in 2005. Most estate taxes in the states are linked to this federal credit, and the states that have not unlinked collectively lose $6 billion in revenue each year.
States must “decouple” from the 2001 federal estate tax law amendments to preserve critical tax revenues.
Decoupling protects state taxes by linking state tax code to the pre-2001 federal law. Decoupling maintains the level of estate tax revenues received in prior years.
As states work to recover from the budget shortfalls of the recent fiscal crisis, it is crucial that tax revenues are preserved.
For three years, states struggled with unprecedented budget deficits—and the bulk of their problems originated from reduced revenues. Fiscal conditions have improved, but states will need strong revenue growth to restore cuts to social programs made during the recession. It makes little sense to let a federal policy dictate a state’s ability to serve its people.
Loss of estate tax revenues will make it difficult for states to restore services cut during the recession.
When public services are cut, low-income families suffer first. If states cut taxes rather than restore services at the end of a fiscal downturn, investments in education, health and transportation remain low.
This is the wrong time to provide additional tax breaks to the rich.
Estate taxes are designed to impact only the wealthiest Americans. The federal estate tax, for example, is paid on behalf of less than two percent of those who die each year. The repeal of estate taxes enriches heirs of millionaires and billionaires while hurting families who struggle to make ends meet. States that have not yet decoupled should do so—and states that have decoupled must work to retain the estate tax.
Seventeen states and the District of Columbia have decoupled from the federal estate tax.
Of these, 12 states (CT, IL, ME, MD, MA, MN, NE, NJ, NC, RI, VT, WI) enacted legislation to decouple from the federal changes. Five other states (KS, NY, OR, VA, WA) and the District of Columbia have laws that do not automatically change with federal law—they remain decoupled without further legislative action.1

This policy summary relies in large part on information from the Center on Budget and Policy Priorities.

Endnotes
  1. Elizabeth McNichol, “Many States are Decoupling from the Federal Estate Tax Cut,” Center on Budget and Policy Priorities, March 2006.
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