As the Bush tax cuts rolled toward their 10-year, January 1 expiration date, California budgetmeisters were eyeing a potential windfall.

A resumption of higher pre-2000 estate tax levels would generate billions of dollars in extra federal revenues, millions of which would be passed along to California through the resuscitated state estate tax credit that died in 2004 as part of the Bush tax cuts. 

Norton Francis at the Tax Policy Center estimated that 30 states (those without their own estate taxes) would divvy up $3 billion annually and that California’s share of the take could reach $1.2 billion a year by 2015-16.

But the state got hit by a double whammy. As part of the deal reached this week to avoid the fiscal cliff, estate taxes will not go up and the state estate tax credit is still dead.

Governor Jerry Brown had penciled in $45 million in revenues as part of an optimistic 2012-13 budget scenario, but that’s not happening.

Under the old law, the federal estate tax exemption was $5.1 million per person, with a flat rate of 35%. If no action had been taken by Congress, the exemption would have plummeted to $1 million with a tax rate as high as 55% and the tax credit would have been restored. The new law keeps the $5.1 million exemption, and nudges the top rate up to 40% without restoring the tax credit.

California voters killed the state’s own inheritance tax in 1982 with passage of Proposition 6 a year after the state collected $445 million. The state made up for some of the loss by utilizing a state estate tax credit passed by Washington.

When Congress and Bush ended the tax credit, many states opted to pass an estate tax of their own, but California was precluded from doing that by Prop. 6. Its revival in the state, where more than one-fifth of the nation’s billionaires live, does not appear to be a likely prospect in the near future.

–Ken Broder

To Learn More:

No Estate Tax Revenue for California in Fiscal Cliff Deal (by Chris Megerian, Los Angeles Times)

“Fiscal Cliff” Deal Eliminates Estate Tax Revenue for California (by Kevin Yamamura, Sacramento Bee)

States Face $3 Billion Estate Tax Windfall if We Fall off Fiscal Cliff (by Ashlea Ebeling, Forbes)

Billionaires Aplenty in a State Ravaged by Poverty (by Ken Broder, AllGov California)