A Strong Case for State Estate Taxes

Keep an eye on state estate and inheritance tax debates in 2017. Our newly updated policy brief explains the mechanics, history, and current status of state estate and inheritance taxes, and how states can adapt or improve them.

Debates over estate and inheritance taxes in the states will be important barometers of at least three major questions:

Are state legislators committed to promoting equality of opportunity? Estate and inheritance taxes are two of the most progressive revenue options available to states, applying only to the very wealthiest estates while protecting family farms and small businesses. As such, they are an important tool for states that wish to equalize opportunities and build broad prosperity for all their residents. Unfortunately, the most recent state developments have worked in the opposite direction. New Jersey legislators, for example, voted just this year to phase out their estate tax entirely by 2018 as part of a regressive tax package skewed to the benefit of wealthy families.

Will states step up to the challenge of taking on more responsibility in an era of likely federal retrenchment, or allow the whims of Congress to determine their fates? State and federal estate tax laws worked in harmony for about 75 years, as most states designed their estate taxes to match a federal credit so that the revenue from breaking up the country’s largest fortunes was shared between them. When federal lawmakers phased out that credit between 2001 and 2005, however, states had to decide whether they wanted to continue playing a part in that effort. Most states declined to act, resulting in only 18 states currently having estate or inheritance taxes, many of which are still tied to federal statute in some way. If Congress moves to further weaken or repeal the federal estate tax, the responsibility will fall even more on states. With possible major federal budget cuts also likely harming states, estate tax fights could set the tone for whether states will passively accept such harmful federal changes or make an effort to take matters into their own hands.

Will our communities be strengthened by increased investments in education, health care, and public safety made possible through this progressive revenue source, or weakened by single-minded devotion to tax cuts that undermine those investments? States play a crucial role in paying for the education, health care, public safety, and infrastructure that build strong communities and economies. Estate and inheritance taxes are rarely major portions of state budgets, but nonetheless represent significant revenue streams that promote these values. States that wish to protect and strengthen their communities and economies will have the opportunity to show it as these estate and inheritance tax debates proceed.