Governor Easley and the General Assembly Propose to Reinstate the Death Tax

But in this world nothing can be said to be certain, except death and taxes.

Benjamin Franklin in 1789 letter to Jean Baptiste LeRoy

  THE ISSUE: The North Carolina death tax


FY 2002-2003 $112,504,407 N.C. Department of Revenue; Table 2. State General Fund: Tax Revenues by Source
FY 2002-2003 $128,479,443 N.C. Department of Revenue; Table 2. State General Fund: Tax Revenues by Source

FY 2004-2005

Authorized Collections

$136,200,000 Schedule of Assets, Liabilities and Fund Balance – Budgetary Basis; pg. 2; Schedule of Operations – General Fund

FY 2004-2005

Estimated Collections

$139,420,000 N.C. State Budget, Summary of Recommendations by Governor, Table 9, page 18
2005 Session (per Senate) Proposed Collections $ 30,700,000 Senate Bill 622
2005-2006 (per Governor) Projected Revenue $138,080,000 N.C. State Budget, Summary of Recommendations by Governor, Table 9, page 18

PENDING BILLS IN 2005 SESSION: Senate Bill 622; Sec. 37.1(a) & (b); 4th Edition (2005)

STATUTORY CITATION: N.C. Gen. Stat. §105-32.1 to §105-32.8

SUMMARY: North Carolinians may have thought that North Carolina’s “death tax” had been repealed in 1998. But the North Carolina General Assembly has proven that Benjamin Franklin was right about “death and taxes.” Rather than being repealed, North Carolina’s death tax is costing its citizens $117 million a year. Governor Easley’s Recommended Budget projects $138 million in death taxes. The budget bill (SB 622) recently passed by the Senate would raise another $30 million in death taxes, rather than let the provision expire.

EXPLANATION OF ISSUE: The federal estate tax was established in the early 1900s. Originally, it was set at a very low rate. Then in the early 1930s, under President Franklin Delano Roosevelt, a system that gave the federal government more control over the redistribution of wealth after someone died was enacted. The federal government, for the next 40 years, imposed a 70 percent marginal death tax rate in an effort to appropriate and redirect a large portion of wealthy people’s assets upon their death.

Before enactment of the federal estate tax, states were given the authority and prerogative to tax inheritances and estates. The states were not happy with the federal government’s enactment of an estate tax because they thought it usurped one of the state’s traditional and consistent sources of revenue.

To reach a compromise, the federal government agreed to allow a credit on a person’s estate tax liability that would go to the state. This has become known as the “pick up” tax. The “pick up” tax is exactly equal to the amount an estate can claim as a federal exemption. So essentially, the tax, which would be the same for the taxpayer, goes to the state rather than the federal government.

The revenue a state could collect was directly dependent upon the federal estate tax rate.

There have been changes in the estate (sometimes called the death or inheritance) tax in the last several years on both the state and federal level. In 1998, under Republican leadership, North Carolina, along with 36 other states, repealed its regular death tax. This was an effort to protect small family farms and small family businesses from foreclosure due to paying estate taxes. Upon repeal of the North Carolina death tax, the state then depended entirely on the “pick up” tax (Session Law 1998-212; Section 29A.2.(a)). Revenue generated by the “pick up” tax in 1998-1999 was $31.8 million more than the state collected in 1997-1998, under North Carolina’s repealed death tax.

Then in 2001, the U.S. Congress began a phase-out of credits previously allowed that directed estate tax revenue to the states. The phase-out was to take place between January 1, 2001 and January 1, 2005. The phase-out would directly affect the states’ share collected under the “pick up” tax since the federal estate tax was being phased-out.

In 2002, North Carolina chose not to comply with the federal law. The federal phase-out made the full credit no longer available. However, leaders in North Carolina chose to continue to levy the estate tax as if the full “pick up” tax rates still applied. So what should have been a tax cut, had our leaders chosen to comply with the new federal law, became a tax increase.

Faced with a budget crisis in 2002, state leaders changed the law to tax estates at the maximum credit without regard to the federal phase-out and they promised it would be temporary, effective only through January 1, 2004 and then it would sunset. The 2003 General Assembly, instead, chose to keep the maximum credit rate and extended the sunset date to July 1, 2005.

The 2004 General Assembly repealed the estate tax for the estates of decedents dying on or after July 1, 2005.

The proposal in the Senate budget would reinstate the estate tax, making it effective on estates of decedents dying on or after January 1, 2002. This line item is called “conform estate tax to federal sunset” (Senate Bill 622; 4 th edition, Part XXXVII). The Senate estimates that revenue from this estate tax will be $30 million the first year, and $120 million the second year.

In the Governor’s proposed budget, the death tax is combined with “all other taxes” (N.C. State Budget, Summary of Recommendations by Governor, Table 2, page 4). Projected revenue estimates are $139 million in 2004-2005; $138 million in 2005-2006; and $128.4 million in 2006-2007 (N.C. State Budget, Summary of Recommendations by Governor, Table 9, page 18).

This is another example that’s becoming all too familiar: Raise taxes, promise they will only be temporary, extend the sunset, re-impose the tax again, tell the public it’s not a tax increase, extend the sunset again, say it’s still not a tax increase, and on and on and on. Sound familiar? 



• SB 1366; Repeal of Death Tax, 1989 N. C. Session Laws, Chp. 212, sec. 29A.2(a).

Repeals the death tax


• SB 1115, Modify Appropriations Act; 2002 N.C. Session Laws, Chp. 126, sec. 30C.3.

See also Overview: Fiscal and Budgetary Actions of NC General Assembly, 2002 Session, Page P-8.

Adds language to include estates of decedents dying on or after Jan. 1, 2002 and imposes the tax without regard to the federal phase out.


• HB 397, 2003 Budget Act 2003; N. C. Session Laws, Chp. 284, sec. 37A.4 & 37A.5

Adjusts estate tax to extend sunset to include estate of decedents dying on or after July 1, 2005 and adds that it imposes the tax without regard to the termination of the federal credit.


• SB 1145 Revenue Laws Technical Changes, 2004 Session Laws, Chp. 170, sec. 1

Repeals Estate Tax effective for estates of decedents dying on or after July 1, 2005


• Senate Bill 622; Sec. 37.1(a) & (b); 4th Edition (2005)

There were no amendments offered that affected Sec. 37.1(a) & (b)

The amendments to the third edition were engrossed into a 4 th edition which was sent to the House and referred to the Committee on Appropriations

Reimposes North Carolina Estate Tax regardless of the Federal Phase out

This article was posted in Budget & Taxes by efield on June 2, 2005 at 12:00 AM.

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