Extension of Bush Tax Cuts Costs Wisconsin $219 Million of Anticipated Estate Tax Revenue

Close up of George Washington a dollar bill

The extension of Bush-era tax cuts will cost Wisconsin millions in expected estate taxes.

The fiscal cliff bill enacted this week complicates the task of balancing the next state budget.  The latest fiscal challenge doesn’t result from a cut in federal aid, although that is likely to be one of the effects once the “sequester” or alternative budget cuts go into place.  Instead, the new budget challenge stems from the extension of the Bush tax changes, one of which prevents the state estate tax from going back into effect – thereby eliminating $219 million of revenue that the Walker Administration’s budget documents had assumed the state would receive in the 2013-15 biennium.

To make sense of this development, you need to understand that federal law formerly allowed state estate taxes to be used as a credit against federal estate tax liability. Wisconsin and the vast majority of states took advantage of that and designed their estate taxes so they wouldn’t increase the amount of taxes an estate owed; the states merely captured a portion of the revenue that would otherwise go into the federal treasury.

The tax changes enacted in 2001 repealed that credit for state estate taxes – which had the effect of eliminating the state taxes that were tied to the credit.  That change hurt the states but yielded money for the federal treasury – enabling Congress to make additional cuts to federal taxes while trying to stay within their self-imposed cap on the amount of red ink they were allowed to add to the federal budget.  (Nevertheless, the Bush tax cuts would have exceeded the 10-year limit on red ink, so they were written to expire after 8 years – to create the appearance of staying within the cap.)

When state legislators learned of the elimination of the credit, they quickly amended the 2001-03 budget by adding a measure that created a new Wisconsin estate tax statute, which wasn’t contingent upon the credit against the federal tax.  The compromise approved at that time made the new Wisconsin estate tax sunset in 2008, but kept the previous estate tax law on the books so it would resume if federal law restored the credit.

Because all of the Bush tax changes were set to expire on January 1, 2013 (following a couple of extensions), the credit for state estate taxes would have been restored, which would have resurrected Wisconsin’s estate tax.  With that fact in mind, budget documents prepared by the Walker Administration and the Legislative Fiscal Bureau have assumed that Wisconsin would collect about $219 million in estate tax revenue in the coming biennium.  (See our Nov. 20 blog post.)

The fact that the Wisconsin estate tax is not being resurrected should not come as a shock to anyone.  In a May 2011 blog post about a projection of a state surplus in the 2013-15 biennium, I critiqued the premise that the estate tax revenue would actually materialize in the coming budget and wrote, “no one who follows the estate tax issue closely expects Congress to allow that to happen.”  However, all of the assertions over the last year or two that the state had eliminated the structural deficit have been premised upon the assumption that Wisconsin would resume collecting estate taxes this year.

Not all states are affected by the permanent elimination of the federal credit for state estate taxes.  A number of other states continue to have estate taxes because they followed Wisconsin’s lead in decoupling their statutes from the federal law, but unlike Wisconsin they didn’t sunset their revised estate tax laws.  Now it’s time for Wisconsin to follow their lead and adopt a stand-alone Wisconsin estate tax.

For more, go to www.wisconsinbudgetproject.org

Photo by SqueakyMarmot released under a Creative Commons license.