Will the State Estate Tax Resume? — What’s at Stake for Wisconsin in the Fiscal Cliff

Friday, December 14, 2012 at 2:52 PM by

Day 8: Going over the Fiscal Cliff Could Generate $219 Million for Wisconsin Treasury  

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 federal estate tax will increase on January 1, 2013, and the state estate tax will resume. 

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 that the state has little or no structural deficit have been premised on the assumption that Wisconsin will be collecting estate tax revenue in 2013-15.  That strikes me as ironic because Governor Walker will probably oppose resumption of the tax, if a federal budget compromise doesn’t keep it from happening.     

To explain this anomalous part of the fiscal cliff, I need to provide a brief summary of the development of the Bush tax cuts.  As that tax reduction package was being crafted by Congress and President Bush in 2001, federal lawmakers ran up against a cap on growth in the deficit, imposed by their budget rules.  They found a couple of ways to circumvent that restriction – one of which was to phase out a longstanding part of federal law that allowed state estate taxes to be counted as an offset against an estate’s federal tax. 

In essence, a part of the federal law that is slated to resume in January enabled states to structure their own estate tax as a credit against an estate’s federal liability.  By phasing out that credit, the 2001 federal tax bill essentially invalidated most state estate taxes, because they were contingent upon the credit.  The 2001 law also reduced federal estate taxes, and it offset the cost to the U.S. Treasury by eliminating the ability of states to capture a portion of federal estate tax revenue.  

The potential resumption of state estate taxes in January can be explained by another major ploy that Congress used in 2001 to circumvent the cap on increased red ink.  Because that cap was a ten-year total, Congress decided to keep its tax cuts within the limit by “sunsetting” or ending the cuts after 8 years!  That was just an accounting trick, because they figured that a future Congress would continue the tax cuts, and that has indeed been the case – as Congress has approved several short-term extensions.  However, those extensions expire at the end of this year, and the federal estate tax law will revert back to its 2001 form, which includes the credits that would trigger restoration of the Wisconsin estate 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. 

Allowing state estate taxes to be subtracted from the federal tax would be great for states that want their estate taxes to resume, but it would increase the federal deficit unless Congress and the President can find offsetting spending cuts or tax increases.  The much more likely scenarios would undo a little of the large cuts to the federal estate tax over the last decade, but without restoring the credit for the state taxes.  

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.  

Jon Peacock

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