	Introduction

An estate tax is a tax levied on the assets left behind by a decedent. The federal government and many state governments levy estate taxes or some type of tax on the transfer of assets at death. Under current law, the estate tax is scheduled to revert to the pre-2001 structure on January 1, 2013, with a $1 million exemption and top rate of 55%. In contrast, the federal estate tax currently allows for a significantly higher exemption amount, $5.12 million, and a significantly lower top rate of 35%. The Administration's FY2013 budget proposes a middle ground between those options with a $3.5 million exemption and top rate of 45%. This report provides an overview of the federal estate tax since 2001, highlighting recent trends in federal and state estate tax revenue. The report will be updated as legislative events warrant. Three alternatives are examined for this report: (1) revert to the pre-2001 law, (2) extend the 2012 law, and (3) return to the 2009 law as proposed in the Administration's FY2013 budget proposal (see Table 1 for a summary of the proposals). For example, the federal estate tax could be repealed. If the federal estate tax were repealed, repeal of state estate taxes would likely follow. This option would most likely be considered in the context of broader tax reform and is beyond the scope of this report. The Economic Growth and Tax Relief Reconciliation Act of 2001

As noted above, the federal estate tax is scheduled to revert to the pre-2001 structure absent congressional action. 107-16 ). This example will use 2012 law except for the treatment of state death taxes paid ("death" taxes because the credit could also be used for inheritance and succession taxes). First, most state estate taxes are linked directly or indirectly to the federal estate tax law. The dollar-for-dollar federal credit for state death taxes meant that the state estate tax did not add any additional estate tax burden, as it offset some part of federal liability. The change to the deduction under EGTRRA meant that state estate taxes would impose an additional burden on decedent estates. A recent report by the Minnesota House Research Department identified 14 states (and DC) with an estate tax, 6 states with an inheritance tax, 2 states with both an estate tax and an inheritance tax, and 2 with a stand-alone gift tax. This provision created the equivalent of a revenue sharing arrangement between the federal government and the states as most states structured their taxes to match exactly the federal credit. Reversion to the pre-2001 law and the return of the credit for state death taxes, however, would not make the estate tax more progressive when compared with the President's budget proposal or extension of the 2012 law. In contrast, a deduction for state estate taxes, which would accompany both extension of the 2012 law and the Administration's budget proposal based on 2009 law, increases the tax burden and thus the economic efficiency loss arising from state estate taxes. Which course of action Congress will choose is uncertain and the impact on the states unclear. Coordination with states would likely reduce administrative and compliance costs of the estate tax, increase the progressivity of the code generally, and possibly increase the economic efficiency of state estate taxes.
An estate tax is a tax levied on the assets left behind by a decedent. The federal government and many state governments levy estate taxes or some type of tax on the transfer of assets at death. In 2012, the federal estate tax allows for a $5.12 million exclusion and a top rate of 35%. The federal estate tax is scheduled to revert to the pre-2001 structure on January 1, 2013, with a $1 million exclusion and top rate of 55%. The Administration's FY2013 budget proposes a federal estate tax with a $3.5 million exemption and top rate of 45% for 2013. Many states also levy estate or inheritance taxes (or both) that are linked to federal law. If the federal estate tax is allowed to revert to pre-2001 law, state and federal estate tax revenue will increase significantly by imposing a greater tax burden on estates than would an extension of 2012 law or the President's FY2013 budget proposal. The percentage increase in state estate tax revenue would likely be greater than the percentage increase in federal estate taxes under a return to pre-2001 law. The principal cause is the return of the federal credit for state death taxes when the tax changes originally enacted by the Economic Growth Tax Relief and Reconciliation Act in 2001 (EGTRRA, P.L. 107-16) expire.
Before EGTRRA, all 50 states and the District of Columbia imposed an estate tax where state estate taxes were linked directly to the federal credit for state death taxes paid ("death" taxes because the credit could also be used for inheritance and succession taxes). The dollar-for-dollar credit meant that state taxes were not an additional burden, creating the equivalent of a revenue sharing arrangement between the federal government and the states as most states structured their taxes to match exactly the federal credit. EGTRRA gradually replaced the federal credit with a deduction. Because of this change to a deduction, state estate and inheritance taxes were no longer offset on a dollar-for-dollar basis and, as a result, imposed an additional burden on estates and heirs. States were then lobbied for relief from this additional estate tax burden. As a result, by 2012, just 16 states and the District of Columbia imposed an estate tax and 8 states imposed an inheritance tax (2 states levied both).
As Congress considers the future of the federal estate tax, questions concerning the coordination of the tax with the states have arisen. This report examines the interaction of federal and state estate taxes under three policy alternatives: (1) extend the 2012 law, (2) revert to the pre-2001 law, and (3) return to the 2009 law as proposed in the Administration's FY2013 budget proposal. A fourth option, repeal of the federal estate tax, has also been proposed. If the federal estate tax were repealed, repeal of most remaining state estate taxes would likely follow. This option, however, would most likely be considered in the context of broader tax reform and is beyond the scope of this report.
Which course of action Congress will choose is uncertain and the impact on the states is unclear. What is more certain is that coordination with states would likely reduce administrative and compliance costs of the estate tax, increase the progressivity of the code generally, and possibly increase the economic efficiency of state estate taxes.
This report will be updated as legislative events warrant.