NEW JERSEY PASSES NEW ESTATE TAX LAW
The estate tax is back. Well, at least in New Jersey. And I hate to tell you that I told you so, but I have mentioned in the past that the new federal law President Bush signed in June 2001 – a law that, in part, called for the repeal of the federal estate tax – probably never would be fully implemented.
There’s a federal deficit now – it’s about $200,000,000. There was a federal surplus in June 2001. And the federal tax act isn’t even fully implemented. You remember, the act that was going to result in about 1.3 trillion dollars in savings to the U.S. taxpayer.
Tax cuts are nice. I pay taxes, and if someone asked me if I’d rather not, I’d say yes. Think of all the nice things I could buy with the money I use to pay in taxes!
But taxes are necessary. Taxes are the price the government charges for the services it delivers.
While we can debate whether or not the government efficiently and effectively provides services to us – personally, I believe that there is a tremendous amount of waste – we can’t debate the fact that the government does deliver services and must charge us for the cost of those services.
So, as the budget deficit grows – the war on terrorism; tanking stock prices which result in less capital gains tax; and the June 2001 tax cut itself – the likelihood that the federal tax act will ever be fully realized becomes less and less remote.
New Jersey recently enacted a new statute that eliminates the federal law’s impact on New Jersey tax revenues. Governor McGreevey has been very busy raising our taxes. In addition to the 200 million dollar federal deficit, there are also problems with New Jersey’s budget.
To balance our State’s budget, Governor McGreevey signed a new law into effect on July 1st. The new law affects the State’s estate tax.
The calculation of the state estate tax gets a little tricky as it bears a proportional relationship to the credit that the federal government provides against the federal estate tax, but here’s a simplified explanation. Before January 1, 2002, before President’s Bush’s new tax act took effect, a person’s estate would pay an estate tax to the federal government if the estate were greater in value than $675,000.
The federal estate tax rate went as high as 55%. As a credit against the federal estate tax, the federal law allowed an estate to reduce the amount payable to the federal government as an estate tax by the amount of tax that the estate paid to a state. So, if an estate had a tax liability of $50,000 owing to the federal government but had paid $5,000 to New Jersey for estate tax, then only $45,000 would be due to the feds.
Under the old tax scheme, New Jersey’s estate tax did not increase the overall tax liability of the estate; it simply allocated a portion of the estate tax to the state, reducing the federal estate tax liability. But President Bush’s new law reduced, and eventually eliminated, the credit that the federal government would give to an estate for state estate tax paid. Since New Jersey’s old law was based on a formula that basically made the state estate tax equal to the amount that the federal government allowed as a credit, President Bush’s new law would have eliminated New Jersey’s estate tax – and its tax revenue, about $240,000,000 per year.
The law that Governor McGreevey signed on July 1st freezes the amount due to New Jersey at the amount that would have been due to New Jersey as of December 31, 2001. Now, despite the fact that a reduced, and eventually no, credit will be given to an estate against federal estate tax for the tax paid to a state, New Jersey still will be entitled to its estate tax.
I think this new law is important because it is harbinger of the changes that are coming to President Bush’s law. The June 2001 law was great for political reasons, but the ability of the government to implement the law is less than promising.