If Congress takes no action this year on estate tax legislation, in 2011, the status quo is that it will revert to an estate tax exemption of $1,000,000 per decedent, with graduated rates that start at 37% for the first marginal dollar beyond the exemption amount, a top normal rate of 55%, and a "bubble rate" of 60% that reclaims the benefits of lower progressive rates in large estate before reverting to 55%.
Under the old regime that we will revert to if Congress remains in deadlock, there was a credit against the federal estate tax due for state estate taxes that did not change a person's overall estate tax liability. It simply allowed states to "pick up" a share of the federal tax due.
Colorado repealed its pick up tax when the estate tax legislation in effect through this year was passed, because the state estate tax credit was repealed and replaced with a deduction. But, if the state estate tax credit returns to the tax code for a while due to Congressional inaction, should Colorado re-enact its pick up tax?
A Congressional deadlock is unlikely to last for very long. The President and a plurality of Democrats want to return to something close to the 2009 status quo, with a $3.5 million exemption amount, at 45% tax rate on non-exempt assets, and no state estate tax credit. A small number of Democrats and most Republicans want to increase the exemption and lower estate tax rates, or to abolish the estate entirely. Only a small minority of Democrats actually want the estate tax to be restored to the levels it will unless Congress acts otherwise. So, sooner or later, some sort of deal will probably be reached to abolish the utility of a pick up tax again.
But, given that most outsider observers were sure that compromise legislation would be enacted by late 2009, and in fact, estate tax legislation is almost certain not to be passed any sooner than after the election in 2010, there is a real chance that there will be a temporary chance for Colorado to secure some pick up tax revenues from those decedents unlucky enough to die in early 2011 with the toughest estate tax in a decade, rather than in late 2010, during which there was no estate tax in force.
From a policy perspective, it seems clear that Colorado should put a pickup tax back on the books. A pick up tax imposes no additional taxes on Colorado decedents, costs almost nothing to collect since the auditing and return processing work is done by the federal government, and provided a meaningful source of state revenue to a cash strapped state when it was in force. It would cease to collect revenue automatically, however, when and if Congress were to reach a compromise abolishing the state tax credit again.
Practically, however, this kind of nimble action may be out of reach, because enacting a "pick up tax" would probably be counted as a new tax for TABOR purposes, which requires a popular vote to be approved, and that probably couldn't happen swiftly enough for Colorado to take advantage of what will probably be a temporary revenue opportunity. Still, is a tax really a tax if it doesn't require anyone to may more to the government than they did before it was enacted? This seems as fair a way as any to define a tax for constitutional purposes under TABOR, and constitutional language should be interpreted with an eye towards the measure's intent, which is clearly focused on revenues raised as much as it is on formal labels.
It would certanly be worth a try in the 2011 legislative session. At best, it raises millions of dollars that could be devoted to activities under budget stress, like higher education. At worst, a little legislative time out of a largely fixed supply of legislative time and money will go towards the bill and it will be declared in violation of TABOR, with no real harm done.
Alternately, Senators Udall and Senator Bennet, along with Senators from other similarly situated states, could try to squeeze legislation into must pass omnibus spending and tax extender bills in the lame duck session this year that would transfer the amount that would otherwise have been due to states under their pickup taxes, as unrestricted block grants to those states, in the event that no further compromise is reached on estate tax reform. This would be something of a long shot, but given that so many states are hard pressed budgetarily, and the way it appears to a sense of fairness among the states that matters more in the U.S. Senate than anywhere else, it might have a ghost of a chance of making it into legislation that becomes law in 2010.