Pennsylvania death, gift taxes bring in more money than any other state

Brian Bowling
| Tuesday, March 31, 2009

Benjamin Franklin once quipped that nothing is certain "except death and taxes," but even he couldn't know a tax on death would be just as certain in his home state.

Census Bureau figures released Monday show that about 2.5 percent of Pennsylvania's 2008 revenue came from "death and gift" taxes, the highest percentage of any state. Death taxes can take one of two forms — a tax on the estate of the deceased or a tax on the amounts inherited by survivors. Until 2003, Pennsylvania had both.

While the state has followed the federal government and a majority of states in phasing out the estate tax, Pennsylvania clings to its 183-year-old inheritance tax.

Gerald Prante of the Tax Foundation, a national nonprofit, said most states have stopped trying to tax death-related property transfers.

"Most states have lowered theirs drastically in the last few years," he said. "In many states now (death taxes are) zero or close to zero."

Census Bureau figures show three states had no death or gift taxes in 2008 and only 13 states derived more than 1 percent of their total revenues from those kinds of taxes. By comparison, all states had some kind of death or gift tax in 2001 and 26 derived more than 1 percent of their total revenues from those taxes.

Pennsylvania got about 3.4 percent of its total revenues from death and gift taxes in 2001, second only to South Dakota at 3.6 percent. But South Dakota derived less than 1 percent of its revenues from death and gift taxes in 2008.

Prante said Pennsylvania seems to rely more than most states on specialty taxes rather than broad-based ones such as income and sales taxes. The Census Bureau figures show that Pennsylvania ranks 33rd for the amount of its total revenues that come from general sales taxes and personal and corporate income taxes.

The foundation's analysis also shows that Pennsylvania has the 11th-highest tax burden in the country, with tax revenues representing about 10.2 percent of household income. The national figure is 9.7 percent.

Tax analyst Jim Walschlager said Pennsylvania is one of eight states that still has an inheritance tax. The others are Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey and Tennessee. Walschlager works for CCH, an Illinois firm that provides tax and business law information.

Anthony Infanti, a University of Pittsburgh law professor who specializes in tax theory, said Pennsylvania initially tried to cling to its estate tax when Congress passed a 2001 law that phased out the federal estate tax.

Before 2001, Pennsylvania and 32 other states only had a "pick-up" tax based on a federal credit that allowed estates to deduct state taxes from their federal tax. The 2001 federal law eliminated the credit, and most states allowed their state taxes to dwindle with the federal credit.

Pennsylvania initially passed a law maintaining the state estate tax, but the General Assembly reversed itself in 2003 and followed other states in phasing it out. But the state didn't make any changes to its inheritance tax.

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