$50 Billion Per Year is Not Pocket Change

As reported in the Washington Post on March 25, advocates of estate tax repeal have redirected their efforts to state legislatures, pressuring them to "update" their estate tax laws to reflect the changes implemented in last June’s $1.35 trillion tax cut.

As reported in the Washington Post on March 25, advocates of estate tax repeal have redirected their efforts to state legislatures, pressuring them to "update" their estate tax laws to reflect the changes implemented in last June’s $1.35 trillion tax cut.

With a 10-year cost to the federal government of $138 billion, the phase out and one-year full repeal of the federal estate tax makes up the third largest component of last year’s massive tax cut. At the time the tax cut was passed, many people pointed out that the true costs of the repeal provisions were disguised by the limited 1-year duration of full repeal, and that the Federal government would actually lose at least $50 billion for each year full repeal remained. Another less well-known cost-cutting gimmick used to cram the costly estate tax repeal into an overloaded tax cut package was the early phase-out of the credit for state estate taxes.

In 37 states and the District of Columbia a portion of the federal estate tax paid by estates located in those states goes to the state’s general revenue fund. According to a Center on Budget and Policy Priorities (CBPP) January 2002 analysis, in 2001, this "pick-up" tax brought in nearly $5 billion in revenue, an average of 1.3% of the states’ general revenue funds. In another 12 states, which levy their own estate (or inheritance) taxes, $662 million was generated. The same CBPP report shows that, as a result of the rapid phase-out of the states' "pick-up" tax measures, as well as the phase-out and full repeal of the federal estate tax, 49 states and the District of Columbia stand to lose an estimated $6.5 billion in FY 2003. This loss represents a substantial chunk of state revenue shortfalls, which are projected to total almost $50 billion for all states in FY 2002 and are expected to continue through FY 2003. The recently enacted economic stimulus legislation will further exacerbate budget shortfalls by reducing corporate income tax revenue (most states also collect their corporate taxes based on those the federal government collects) and by not providing federal assistance to state budgets.

A February 2002 report from the National Council of State Legislatures (NCSL) indicates that at least 30 states have implemented budget cuts to help balance their budgets -- a state requirement in 49 states. The NCSL report emphasizes that the "magnitude of budget gaps has been significant enough that even programs that often are spared from cuts, such as K-12 education, have been reduced in some states." Other examples of the impact of these revenue declines include cuts to job training and child care programs, the cancellation of capital projects including badly needed improvements and modernizations for overcrowded schools, state hiring freezes, and increases in state employee health care plans. Though some analysts are saying that the national economy appears to be out of the thick of the recession, many are predicting that state budgets will continue to suffer as their local economies are slower to recover.

State revenue shortfalls and the resulting enacted and anticipated spending cuts make recent campaigns by estate tax repeal advocates all the more troubling. In Washington State, for example, Seattle Times publisher Frank Blethen led others in advocating that the state legislature drop its pickup tax. In a February 11 editorial piece in the paper that was simultaneously covering the deficit-ridden state budget woes, the Seattle Times argued that Washington State should shrink its estate tax "unless this state wants to be known for hoisting a flag hostile to family-owned business." Washington’s legislature and those of at least 8 other states and DC rightly decided that they could not afford to grant the estimated 2% of their wealthiest residents with taxable estates this costly tax break. Instead, they will make the changes in their state laws to enable them to levy an estate tax, just as they have for more than 75 years, even as the federal estate tax repeal provisions diminish their revenue. But, as the Washington Post reported, "supporters of the [estate] tax cut have vowed to begin a state-by-state battle to repeal the estate tax in as many places as possible."

Congress should not have passed a tax cut it could only fit into last year’s budget resolution at the expense of state budgets and services. With so many pressing health care, homeland security, infrastructure and education needs at the federal, state and local levels, Congress and the President should reconsider this costly and unfair tax cut and relieve some of the pressure on state governments. Until that happens, however, state legislatures and governors must hold strong against the self-described "powerful [estate tax repeal] lobby," for $50 billion each year in lost federal revenue -- and $7 billion in state revenue -- is certainly not pocket change.

back to Blog