Because Congress permanently killed an estate tax transfer to states this week, California stands to lose $45 million in inheritance tax revenue that Gov. Jerry Brown and lawmakers anticipated in their June budget, according to the Department of Finance.
As part of the "fiscal cliff" agreement, Congress permanently eliminated the state estate tax credit, a device once used to return a share of federal inheritance taxes to states. The nonpartisan Legislative Analyst's Office says that likely means California won't receive estate tax revenues again without a vote of the people.
In 1982, voters passed Proposition 6, which eliminated the state estate tax but allowed California to recoup a share of inheritance taxes paid to the federal government. For taxpayers, that ensured California estates would not have to pay more than the federal tax.
In 2001, Congress and President George W. Bush phased out the state estate tax credit entirely by 2005, eliminating the transfers the federal government gave to states like California. Some states imposed new estate taxes thereafter, but Proposition 6 prevented California lawmakers from doing so.
When the Bush-era tax rules were scheduled to expire after 2010, state fiscal officials said California stood to gain as much as $2.7 billion in estate tax transfers from the federal government. But Congress then extended the Bush tax rules for two years up to the fiscal cliff deadline this week -- and now have permanently blocked the state tax credit. Estates are only taxed federally above $5 million.
California officials this time were counting on only $45 million in 2012-13 based on their interpretation of the situation, but that money will not arrive.
Finance spokesman H.D. Palmer said his department typically has to use existing federal law as a basis for its projections. When compiling Brown's new January budget before the fiscal cliff deal, the department actually assumed another $290 million in estate tax money in 2013-14. But Finance used a separate accounting mechanism to erase the estate tax proceeds, knowing that the funds were unlikely to show up, Palmer said.
Updated with additional information from Finance and revised terminology.