NCPA - National Center for Policy Analysis

States Revising Gift And Death Taxes

January 24, 2000

For years, the elderly and affluent have been encouraged to leave states which impose high gift and estate taxes and move to states where those taxes are more reasonable. But that may be changing because state legislatures have revised their laws to bring them more in line with federal law.

At issue is a complicated federal law known as the unified tax credit which applies to estates valued at more than $675,000 this year.

  • Above that level, gifts and estates are taxed by the federal government at 37 percent to 55 percent -- depending on their size.
  • But state estate taxes of up to 16 percent can be claimed as a credit on federal returns -- and reduce the federal burden dollar for dollar.
  • This means that the combined federal and state taxes are no greater than the federal tax would have been alone.

So states such as Nevada which did not previously have an estate tax are enacting them, since at up to 16 percent they do not disadvantage the estate, only the federal government -- while states with estate taxes higher than 16 percent have been lowering them in an effort to keep the wealthy elderly from fleeing.

For example, New York had a graduated gift and estate tax that went as high as 21 percent -- costing the estates of affluent residents an extra 5 percent beyond the federal taxes. So New York bought the estate tax rates down to conform to federal law, effective Feb. 1, 2000.

Thus, if a New Yorkers who has used none of his unified credit dies in 2000 with a taxable estate of $1.5 million, he will have a total tax bill of $335,250 on Feb. 1 or thereafter -- versus $368,350 prior to Feb. 1.

Fourteen states still have estate taxes which exceed the federal tax credit.

Source: Jan M. Rosen, "States Cut Death Tax to Keep Rich at Home," New York Times, January 23, 2000.

 

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