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The Honolulu Advertiser
Posted on: Thursday, June 14, 2001

Federal law to void Hawai'i estate tax

By Kevin Dayton
Advertiser Capitol Bureau Chief

The federal tax cuts President Bush signed into law last week will also effectively phase out Hawai'i's estate tax, reducing state tax collections by about $20 million a year, according to state tax officials.

State lawmakers could intervene to preserve the state's estate tax — sometimes called the "death tax" — by severing it from the federal tax. That would allow the state to continue taxing the estates of Hawai'i's wealthiest residents after they die.

But that would certainly encounter resistance from Republicans and at least some Democrats in the Legislature, and may be politically hazardous.

"This Legislature has found it difficult to tax pensions. I think they're going to find it just as difficult to tax death," said Lowell Kalapa, president of the Tax Foundation of Hawai'i. Hawai'i does not tax pension income.

Marie Okamura, director of the state Department of Taxation, said state tax officials across the country are discussing what to do about the state's estate taxes in the wake of the federal changes.

Thirty-five states have what is known as a "pickup tax," where the state estate taxes are based on the federal tax. Unless the states act, their taxes will all be phased out as the federal tax is eliminated.

Currently the federal and state "pickup" taxes are imposed on estates worth more than $675,000. The tax relief signed by Bush will gradually increase that exemption so that by 2009 only estates worth more than $3.5 million will be taxed.

In 2010, the tax will be repealed entirely, but the law carries a "sunset" provision under which the tax will reappear in 2011 unless Congress takes action.

Lawyers and estate planning experts warn not to count on Congress' keeping the tax repeal. A decade from now, aging baby boomers will begin straining Social Security and Medicare programs, some say. And the projected federal budget surplus may not appear.

Meanwhile, fewer estates will be taxed each year by the federal government and the states that tie their taxes to the federal tax.

If some states continue taxing estates while others stop, that may influence where some people live and retire, Okamura said. If Hawai'i were to continue the tax while other states dropped it, that might discourage wealthy retirees from settling here.

The state Tax Review Commission will begin a series of meetings next month to review the state tax code, and state officials may want the commission to consider the issue, she said.