If New York lawmakers stay set in their ways, wealthy New Yorkers will be shipping off to the shuffleboard courts of Florida before shuffling off this mortal coil. In May, we reported that Governor Pataki and the Republican majority leader of the state Senate, Joseph Bruno, were playing dumb about the state’s skyrocketing estate tax. Lawmakers claimed to be looking into the matter, but as our R.H. Sager reports at page 3, the passage of months and the opening of a new budget process have seen no move to fix the quirk in New York’s tax law that, due to a restructuring of the federal estate tax, will increase the size of the state’s estate tax and the gap between the Empire State and other states.

No doubt lawmakers are counting on the complexity of the issue to buy political cover. But people will see through the game. In 2001, President Bush signed the Economic Growth and Tax Relief Reconciliation Act, which phases out the federal estate tax by 2010. To soften the blow to federal coffers over the interceding nine years, the feds also phased out a tax credit against state estate taxes, basically pushing some of the losses onto the states. Thus, for example, New Yorkers paying the top federal rate in 2001 paid 55% taxes on estates; 39% went to the federal government and 16% — the maximum credit then allowed by the federal government — was sopped up by the state. New York used to be a so-called “sop tax” state, along with most others.

However, because the state’s current estate tax law only incorporates federal changes through July 22, 1998, New York no longer sops up the maximum federal credit, but simply takes its 16% bite, at the highest rate, regardless of the size of the federal credit. Therefore, someone who dies this year in New York will pay 57% estate taxes at the highest rate: a 49% federal tax, minus a reduced 8% federal credit, plus a 16% charge from New York State. The estate tax will reach a high of 60% in total in New York in 2004. It will drift slowly downward after that, with the federal phase-out, but will still be much higher than in sop states such as Florida.

What the results of this will be for New York are clear. Florida can’t institute its own estate tax without an amendment to its constitution. Thus, our southern competitor will once again be a temptation to the wealthy elderly, as it has been ever since Governor Rockefeller kicked the estate tax sky-high in 1959. Our vacation from the estate tax will have been a short one, proving to those who are planning for the long term — i.e., estate planners — that the rich ought not count on moving on to their reward from New York.

Pushing the wealthy out of New York will have consequences. Some of the wealthy will simply flee to lower-tax states, bringing with them their income and sales tax revenue. Even those who try to stay in New York but claim Florida as a residence will have their money diverted out of state before they die. As an attorney at Sullivan & Cromwell told us in May, wealthy New Yorkers with houses in low-tax states need to convince the New York State Tax Commission that they are not New Yorkers. That means filling out an affidavit as to whether a person registered to vote, paid income taxes, worked, operated a business, or joined churches or clubs in New York. All of these activities could be discouraged for rich New Yorkers who don’t want Empire State revenuers to get their hands on the children’s inheritance.

This month or next, state lawmakers will sit down with representatives of the New York State bar association. The bar’s representatives plan to lobby, as they have in the past, for lower estate taxes — specifically, for harmonizing New York’s tax to the federal credit. There’s a simple reason for this: It keeps the estate planning business in New York, as opposed to hundreds of miles south. Messrs. Pataki and Bruno will have to confront the question of whether the bar’s interests and the state’s are so different. At a time when the state and city tax systems depend so heavily on the top earners, do we really want to push the thousands of New Yorkers with estates worth more than $1 million — and hundreds with estates worth more than $10 million — into the arms of the Sunshine State?