WASHINGTON – Maryland could save $250 million to 300 million over the next four years by “decoupling” its estate and inheritance taxes from federal estate taxes, which is currently being phased out.
A study released Thursday by the Center on Budget and Policy Priorities said that states stand to lose billions each year because their death taxes are linked to the federal rate. The report urges states to change their laws so they can keep collecting estate and inheritance taxes after the federal measure is gone.
The study said nearly all states stand to lose some or all of the revenues, with total losses of as much as $23 billion between fiscal years 2003 and 2007. It comes as a tough economy has many states struggling to balance their budgets.
“The last thing they need is to let the federal tax cuts make a bad situation worse,” said Iris Lav, the center’s deputy director and a co-author of the study.
“Many more states should be looking at ways to reduce their revenues losses because of federal tax changes,” Lav said in a prepared statement.
Maryland budget officials said it is a change worth considering.
Warren Deschenaux, director of the Office of Policy Analysis at Maryland’s Department of Legislative Services, said that “if they (state officials) are interested in protecting the revenues, that’s what they will have to do.”
But Deschenaux noted no bills to separate the state and federal taxes are pending.
Rhode Island, Minnesota and Wisconsin have already acted to separate their estate taxes from the federal law. The report said the governor of Maine has also proposed decoupling, and several other states are looking at the issue.
Federal estate taxes can run as high as 55 percent and are expected to raise $50 billion in the next four years, according to Elizabeth McNichol, a co- author of the study.
Under the current federal estate tax, taxpayers pay a share of the tax to the state and receive a dollar-for-dollar credit against their federal estate tax liability.
Although the full repeal of the federal tax is not effective until 2010, the credit for state estate taxes will be eliminated by 2005. The credit will be cut by 25 percent each year, starting this year.
In the majority of states, there are no other state estate or inheritance taxes. State law determines the tax liability by referring specifically to the amount allowed as a credit against the federal estate tax.
Not everyone agrees that states need to rush in and fix the problem — or even that there is a problem.
Maryland Taxpayers Association President Kenneth R. Timmerman said the figures cited by the center’s report are “entirely possible, but insignificant” over the four-year period.
Timmerman calls the report an “ideological commitment to tax people to their death and after their death.”
“It is a good way to drive good wage-earning taxpayers out of Maryland,” he said.