TRENTON - A little known part of the repeal of the federal estate tax will cost New Jersey nearly $700 million in revenues over the next five years-unless the state takes action to de-link from the federal system, according to a report released today by New Jersey Policy Perspective.

Burying Inheritance Tax Puts New Jersey in the Hole explains how the state can avoid losing a penny, and strongly recommends that it do so. NJPP Policy Analyst Sarah Stecker wrote the report.

"The way the federal law is written the cost of dying is going down for the wealthiest people in New Jersey, and everyone else will have to make up the difference," said Jon Shure, president of NJPP. New Jersey Policy Perspective is a nonpartisan, nonprofit organization that conducts research on state issues.

New Jersey's system for taxing inherited wealth has two parts: a state estate tax and a transfer inheritance tax. But the estate tax portion is not a separate tax. Rather, under an agreement worked out between Congress and the states when the federal estate tax was created in 1926, estates get a credit against their federal estate tax that is then paid to the state. For example, a New Jersey estate that owes $108,000 in federal estate tax actually pays $98,250 to Washington and $9,750 to New Jersey.

This arrangement would die with repeal of the federal estate tax. Not only that, but the federal law adopted last year is written so that the state credit segment of the federal estate tax actually phases out sooner than the federal estate tax itself. The federal estate tax is repealed incrementally until it disappears in 2010. But the state credit expires in 2007.

Citing figures from the Center on Budget and Policy Priorities in Washington, the NJPP report says that New Jersey would lose $699 million between Fiscal Years 2003 and 2007 because of the federal estate tax repeal. Here's the breakdown:

Year	Revenue Loss
2003	$51 million
2004	$101 million
2005	$148 million
2006	$190 million
2007	$209 million

Only about 2 percent of estates are large enough to pay federal estate taxes. So the loss of the state estate tax credit would save only the wealthiest New Jerseyans any money. But the loss to the state would be significant. As the report explains, the $51 million New Jersey would lose in 2003 could pay the salaries of 1,002 new teachers. The $101 million that would be lost in 2004 would be enough to more than pay the cost of expanding New Jersey's state Earned Income Tax Credit to the same income eligibility levels as the federal program. The $209 million loss in 2007 would be more than double the $98 million New Jersey now is diverting from sales tax revenue to purchase open space.

Avoiding this revenue loss would be easy. Essentially, New Jersey need only change the wording of its current estate tax law so that the tax is based on the credit that would have been available as federal law stood in 2001. Rhode Island, Minnesota and Wisconsin already have made such a change.

"Doing nothing will cost New Jersey every penny it gets now from estate taxes," Shure said. "With a tax structure already too biased against lower- and middle-income people and with a budget crisis threatening massive cuts New Jersey needs to preserve what it has."

The report warns that the second leg of New Jersey's inheritance tax system also is threatened. So far, six bills have been introduced in the new legislative session to repeal the transfer inheritance tax. This is the tax paid by the recipients of estates in New Jersey. Spouses and children already are exempt from the transfer inheritance tax. So are hospitals, schools and religious and charitable institutions.

Together the estate and transfer inheritance taxes currently make up the fourth largest source of tax revenue in New Jersey, behind the personal income, sales and corporate income taxes. In 2000 inheritance taxes raised $503 million for the state treasury. In recent years the estate tax portion has grown as a percentage of overall inheritance taxes in New Jersey, so that the federal repeal will have an even more negative impact on the state than it would have had at another time.

TAX REFORM

WORK & WAGES

BUDGET & FISCAL POLICY

TRANSIT ISSUES

ECONOMIC DEVELOPMENT

VOTING & GOVT REFORM

© 2008 New Jersey Policy Perspective