The Duffey Law Firm Blog

Tuesday, December 14, 2010

States to Lose Revenue Under Obama – Republican Tax Deal

One aspect of the Estate Tax Deal which passed its first legislative hurdle in the Senate last night is the loss of potential revenue to the States.

California could lose as much as $2.7 Billion due to the change in the Estate Tax Law according to a Bloomberg.com report dated 12/14/10.

Under the current law, the Estate Tax would allow for a $1 Million Dollar Exclusion in 2011, and any amount over that would be taxed at 55%.

An important element of that taxing regime (current law) is that it would allow States to participate in the revenue stream created by that tax.   This is the so called “Soak Up Tax” which was part of the Estate Tax prior to the final years of the Bush Tax Cuts.

The “Soak Up Tax” was a feature of the prior taxing regime.  The Soak Up Tax is reportedly not part of the Obama – Republican Tax Deal.  The Soak Up Tax allowed states like Florida (that has no estate tax of its own) to benefit when a resident of that state owed estate taxes to the Federal government without in any way increasing the taxpayer’s estate tax liability.

The bottom line – some states like California and perhaps Florida may have been counting on those revenues to help them balance revenue starved budgets!

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