Estate and Inheritance Taxes
Estate and inheritance taxes are taxes on the transfer of property at death.
- How much revenue do state and local governments raise from estate taxes?
- How do estate taxes differ across states?
- How did changes in federal law affect state estate taxes?
- Further reading
State and local governments collected a combined $5 billion in revenue from estate, inheritance, and gift taxes in 2015, or less than 1 percent of general revenue. New York collected $1.1 billion of estate tax revenue in 2015, the most in any state. Pennsylvania and New Jersey were the only other states to collect more than $500 million. In total, 10 states collected more than $100 million. Ohio repealed its estate tax in 2013 but still collected $67 million from taxes levied before repeal. Many other states collected small amounts of estate tax revenue for the same reason.
In 2018, 12 states and the District of Columbia levied an estate tax, and Iowa, Kentucky, Nebraska, New Jersey, and Pennsylvania levied an inheritance tax. Maryland levied both. An inheritance tax is levied on heirs rather than the estate.
Like the federal estate tax, all states that tax estates offer an exemption that excludes most estates from taxation. The lowest state exemptions are $1 million in Oregon and Massachusetts. The highest exemptions are in the District of Columbia, Hawaii, and Maine which use the level of the current federal exemption ($11.2 million).
Most states have a top estate tax rate of 16 percent, a relic of the previous federal estate tax credit system (see the next section). However, Connecticut (12 percent), Hawaii (15.7 percent), Maine (12 percent), and Washington (20 percent) have set their own rates.
Before 2001, all 50 states and the District of Columbia had an estate tax because the federal estate tax provided a state tax credit worth 16 percent of the taxable value of the estate. Thus, states could raise revenue without increasing the net tax burden on their residents by linking directly to the federal credit, and all states did this by setting their estate tax rate equal to the maximum credit.
However, federal tax changes in 2001 (the Economic Growth and Tax Relief Reconciliation Act), phased out the federal credit in 2005, replacing it with a less valuable deduction. Because state estate taxes were linked to the federal credit, this meant all state estate taxes would disappear if states did not act. In response to the federal change some states decoupled from the credit and created their own state estate tax, some states repealed the tax outright, and others did nothing (effectively ending the tax).
The Tax Cuts and Jobs Act (TCJA) further changed the estate tax, raising the federal exemption from $5.6 million to $11.2 million ($22.4 million for couples). Before the TCJA, some states had decided to link their exemption to the federal level. In addition to the District of Columbia, Hawaii, and Maine, the exemption in New York will match the federal level in 2019 and Connecticut will match it in 2020. Maryland was set to match the federal exemption amount in 2019 but voted instead to decouple and set its exemption at $5 million. The District of Columbia is also considering setting its own exemption level in response to the federal change. Any state using the federal exemption amount will need to decide if they want to maintain conformity with the federal tax or decouple and set their own exemption.
Back from the Dead: State Estate Taxes After the Fiscal Cliff
Norton Francis (2012)