ALAMEDA, Calif. — Changes to the federal estate tax could leave California holding the bag, Moody’s Investors Service said Monday.
The estate tax language in the tax agreement between President Obama and congressional Republicans could raise California’s already huge 18-month general fund budget gap by $2.7 billion to $28 billion, analyst Emily Raimes wrote in a report released as part of Moody’s Weekly Credit Outlook report.
That would be “a negative development that will increase pressure on the state’s already strained finances and credit,” she wrote. Moody’s rates California general obligation bonds A1.
Tax cuts enacted early in the George W. Bush presidency are slated to sunset on Dec. 31. If that were allowed to happen, the estate tax — currently zero — would return to 55% on estates over $1 million. That 55% rate is the assumption California budget writers have been using, said Jason Sisney, a director in California’s Legislative Analyst’s Office.
“We’ve been pointing out for some time that revenue is in jeopardy,” he said.
California law — approved by voters in 1982 — sets the state estate tax at the equivalent to the federal estate tax’s credit for state taxes. As it stands now, Congress appears poised to approve a 35% estate tax rate.
But Congress appears close to writing the state tax credit out of the federal estate tax, adopting a deduction instead, Sisney said.
If that’s the case, it appears that California would be unable to collect any state estate tax, even if the federal government does, Sisney said.
“I will stress it’s an initial reading,” he said. “The legislative language is quite confusing.”