WSJ: Death Tax Ambush

Wall Street Journal editorial, Death Tax Ambush: Many States Now Have Crushing Burdens:

The new law applies a top federal death tax rate of 35% with a $5 million exemption for 2011 and 2012. But it also changed a federal credit for state death tax rates into a federal deduction. The credit allowed a dollar-for-dollar reduction in federal taxes for state levies as high as 16%. This meant that every dime from state tax collections came from Uncle Sam. It was essentially a free tax for states.

By contrast, the deduction merely reduces the amount of federal taxable income and thus sharply reduces the amount of state tax that can be written off federal taxes. Many states have estate taxes at the old 16% threshold which now means an effective 10 percentage point or more surcharge above the 35% federal rate. This surcharge is even higher in states that also have an inheritance tax, which is levied on the value of specific property bequeathed to heirs, in addition to the estate tax (which is levied on the value of the entire estate).

Our friends at the American Family Business Foundation have done the math on the interaction between the new federal rates and these state taxes, and you can consult the nearby chart to see your state's fee for the privilege of dying. No wonder the battle over death taxes has suddenly moved to state capitals, with Indiana, Nebraska, Ohio, Pennsylvania and even Rhode Island looking to repeal their state levies this year. ...

Proponents argue that the death tax has minimal incentive effects because people can't change their behavior after they die. But every day people make decisions to minimize their tax bills before they die. In other words, estate taxes don't redistribute income among taxpayers. They redistribute income among states.

The federal death tax will revert with a vengeance to 55% in 2013 unless Congress acts in the next two years. But in the meantime, states like Indiana and Ohio, and especially New Jersey, can help their economic recovery by eliminating their death taxes and inviting lost wealth to return.