What is the Pick-Up Tax
The pickup tax was created to allow states to share in federal estate tax proceeds without a separate filing process. The pickup tax was phased out with the passage of the Economic Growth Tax Relief Reconciliation Act (EGTRRA) of 2001. Some states replaced it with their own new estate taxes.
Breaking Down Pick-Up Tax
Federal estate taxes have been around since 1916 and are only due on estates of a certain size. The limit in 2017 was $5.49 million, meaning an estate valued at less than this amount is not required to pay any estate tax. Prior to the beginning of its phase out in 2001 with the passage of new tax laws, the pickup tax was a convenient way for states to simply share in federal estate taxes without needing to create their own guidelines and jump through legislative hoops.
The pickup tax did not assess an additional liability for an estate to pay, but rather represented a sharing arrangement between states and the federal government for the estate taxes collected at the federal level. The costs of collecting estate taxes is disproportionately high given there are not that many people with estates meeting the minimum threshold. There is a good deal of auditing and paperwork involved with settling estates, so the pickup tax left that burden with the federal government while allowing states to share in the proceeds.
When faced with the repeal of the pickup tax in 2001, several states enacted new laws allowing them to continue collecting estate taxes. As of 2018 there are fourteen states, plus the District of Columbia, that collect estate taxes, which range from a low of just under 1 percent to 16 percent. Some states collect inheritance taxes, which differ from estate taxes in that the individuals receiving the proceeds of an estate, and not the estate itself, are responsible for paying the state taxes when they file.
Will the Estate Tax Die?
With the December 2017 passage of the Tax Cuts and Jobs Act, more changes are coming to the estate tax. Effective January 2018, the estate tax threshold is doubling to $11,180,000 for an individual filer, or $22,360,000 for married couples filing joint returns. Given the adverse impact on the size of the US debt, which reached $21 trillion in 2018, these new estate tax exemptions are up for reconsideration or reversion to the previous levels in 2026.
These new higher thresholds mean there will be less estate taxation money collected, and fewer people needing to file. If the federal government eventually phases out the federal estate tax completely, this will leave those states still collecting the tax with some difficult decisions. The administrative costs for auditing and collecting estate taxes on the state level from fewer people may not be worth the potential revenues. States have relied upon the federal government for the bulk of the estate tax administrative costs, as seen with the concept of the pickup tax. As it stands now, estate taxes provide less than 1 percent of all state revenues so many states may decide to eliminate their estate taxes as well.
There is evidence the estate tax works as a disincentive among small business owners who might otherwise invest in machinery and people. Given the trends with the estate tax since 2001, it does not seem out of the question that the estate tax itself wii die off in the not so distant future.