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Estate Tax Reduction Will Impact Many State Budgets

The tax bill in the Senate has the same estate tax provisions, as expected. They are retroactive and would cover 2010, although individual estates can “elect to choose no estate tax and modified carryover basis” in the calendar year 2010. The bill makes it easier to carry over unused portions of the exemption (now $5 million per person and $10 million per couple) to a spouse. The gift and estate taxes get reunified in this bill, which means that giving away all your money to get under the exemption wouldn’t totally work as well anymore.

(There is substantial avoidance of the estate tax. Many rich scions buy life insurance policies, which are tax-free, to give to their heirs upon death, effectively making up for whatever estate taxes with pre-tax money. There are entire industries dedicated to avoiding the estate tax.)

Dan Froomkin is right, this is a massive giveaway to the super-rich. Under these rates, only 0.14% of American estates will be taxed, roughly 39,000 families over ten years in a country of 313 million. Estates that are $20 million or more in size would get a $3.5 million dollar exemption.

But it’s even more than that. Because California assumed in the budget that the estate tax would return to Clinton-era levels, they penciled in a benefit that now has to be reduced by $2.7 billion dollars:

Gov.-elect Jerry Brown on Wednesday hosted the first of what he promised would be several town hall-style forums focused on California’s budget crisis, opting to start acting on the state’s crippling deficit even though he will not take office for three weeks.

He began the forum at Sacramento’s Memorial Auditorium on a dour note, saying the budget deficit over the next 18 months is likely worse than previously reported. He released figures showing California stands to lose another $2.7 billion from potential changes to the federal estate tax, swelling the shortfall through June 2012 to $28.1 billion.

California was stupid to expect the estate tax to return to the Clinton level. But it’s a reminder that the changes to the estate tax affect state budgets. Many states “piggyback” on the federal rates when determining their estate tax, and their share of the reward will now be much lower than current law. This has a material impact on their budgets. What we’ve seen in this Great Recession is that state budget crises have led to immediate increases in taxes or cuts in services, because almost all states must balance their budgets. That “anti-stimulus” has canceled out many of the effects of the federal stimulus package. Here we see that happening in a direct way; less estate tax revenue will mean larger budget crises in many states, including California.

Is that getting factored into the calculations of the economic impact of the tax plan? Probably not.

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David Dayen

David Dayen

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