New York’s Estate Trap

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

Word from Washington that the death tax repeal, or at least reduction, is still possible in the Senate will cheer many Americans, but New Yorkers could be forgiven for being a little glummer than everyone else. Even though the passage of a dramatic scale-back in the tax is long overdue, the form of the bill passed by the House and headed for the Senate harbors some surprises for New York taxpayers. It’s a warning to Albany to shape up now – or residents will be even more likely to ship out to low-estate-tax states.

The plan agreed to by representatives yesterday falls short of an all-out repeal, but it’s close. It increases the exemption to $10 million from the current $4 million, effectively reducing the number of people who have to pay the levy. Under the proposal, an estimated 2,800 estates would fall into the death taxman’s clutches each year, compared to the 12,600 estates that paid the tax this year. The rates on some of the estates would also shrink, to as little as 15% from upwards of 45% under the old law.

The catch for New Yorkers has to do with the fact that the federal legislation would repeal deductions and credits for state estate taxes. In many states that still have a death tax, the state tax rate automatically moves in tandem with the federal tax code because states set their estate tax at the amount of the maximum federal credit. That was briefly true in New York, but due to a quirk in the law when Albany cut the estate tax in 1997, lawmakers didn’t include any provision for the tax rate to change if the federal tax rules were altered.

New Yorkers have been trapped in this vise since President Bush’s 2001 cut in the estate-tax first started taking effect, a trend we chronicled in our recent editorial, “Heading South.” Before 1997, New York had imposed an estate tax of 21%, five percentage points higher than the federal credit at the time. In a move to reduce the tax, lawmakers cut the rate to 16%, a match for the federal credit. For New Yorkers paying the estate tax, the state levy effectively became a wash. Until, that is, the federal law changed. As the federal estate tax has been phasing out, a phase-out that includes a reduction in credits, New Yorkers have been paying more out of pocket, for a difference of up to 16 percentage points compared to states like Florida whose death taxes have declined along with the federal tax.

The scaling back of the federal death tax is a welcome step, and we would not suggest that Senators Clinton or Schumer vote against the measure, although, given their track record on the issue, they probably will. Rather, this is a competitiveness issue for New York state that Albany needs to tackle. If the federal measure passes, as it might considering how close proponents of repeal came the last time it was in the Senate, at least most New Yorkers covered by the federal change will be paying only the 16% state tax, an improvement over the current system. But that will be a 16% tax they wouldn’t pay in a state like Florida that tracks the federal tax code. So it presents a challenge to lawmakers in Albany that gains urgency with every day.


The New York Sun

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