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Could a Prolonged Federal Budget Stalemate Restore the State Estate Tax?

Walker Administration Has Been Assuming $219 Million in New Estate Tax Revenue 

Among the many potential effects of the “fiscal cliff” is a surprising outcome that you probably haven’t heard about – restoring the state estate tax.  Because of changes in federal law enacted in 2001, Wisconsin’s estate tax ended in 2008, although the state law authorizing it remains on the books.  If Congress and the President don’t reach an agreement by the end of the year, the state estate tax will resume on January 1, 2013, and the federal estate tax will increase.

The potential restoration of estate taxes in Wisconsin and many other states is an anomalous part of the current stalemate on federal budget issues, because it would yield an increase in revenue for states and a decrease for the federal treasury.  That’s markedly different from nearly all the other elements of the so-called fiscal cliff, which will either increase federal tax revenue or will reduce federal spending, including federal aid for the states.

The Legislative Fiscal Bureau estimates that resumption of the Wisconsin estate tax would generate $219 million during the 2013-15 biennium.  That wouldn’t be an unanticipated windfall because the Walker Administration’s calculations about the about the state’s improved fiscal outlook have been premised on the assumption that Wisconsin will begin collecting estate tax revenue in 2013-15.  That strikes me as ironic because the Governor will probably oppose resumption of the tax, if a federal budget compromise doesn’t keep it from happening.

A new blog post by the Wisconsin Budget Project examines how federal law eliminated state-level estate taxes in many states, including Wisconsin. And it examines how the attempt by Congress to maximize the Bush tax cuts had the effect of requiring them to have an end date and to be extended from time to time.  That has bought us to the edge of the so-called fiscal cliff, and provides an opportunity to change the federal estate tax and restore the Wisconsin tax.

Although I believe Wisconsin should restore an estate tax (which could be accomplished by amending state law if it doesn’t happen by default), the chances of it being restored are very slim.  Aside from the fact that the Governor might ask the legislature to block its resumption, I think the fiscal cliff negotiations will eventually prevent or undo the restoration of state estate taxes structured like Wisconsin’s.

In short, although an ongoing stalemate in federal budget negotiations could cause Wisconsin’s estate tax to resume in January, I’ll be quite surprised if Congress allows it to be in effect for very long.  However, if the federal “fiscal cliff” negotiations bog down, the estate tax will become an interesting and important issue for state lawmakers.

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WI Budget Project

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