Last year, state lawmakers rushed to enact an inheritance and estate tax in the wake of several years without such a tax at the state level as Hawai‘i had relied on the federal estate tax which provided a tax credit against the federal tax for what was assumed to be an amount the state would have levied on those estates.
However, the federal law did away with what was known as the state death tax credit by 2005 and states like Hawai‘i that tied their inheritance and estate tax to the federal death tax credit did without a state death tax for the next six years. And because the federal estate tax was scheduled to disappear as of January 2010, states like Hawai‘i shied away from replacing the federal credit with a unique state death tax.
However, with the temporary sunset of the federal death tax in 2010, state lawmakers decided to re-enact the state inheritance and estate tax to help with the state general fund budget shortfalls. Since the federal estate tax had basically disappeared on January 1 of 2010, state lawmakers went back and established the state tax based on the federal estate tax law before the state death tax credit was phased out. And since the federal estate tax exemption had grown from $1 million to $3.5 million over the decade, lawmakers adopted an estate tax exclusion of $3.5 million for the state inheritance and estate tax.
Finally, because there had been no state estate tax at the beginning of the year, lawmakers had to make the re-established state death tax apply to those dying after discussions of the new law had taken place. So the re-established state inheritance and estate tax applied to persons dying after April 30, 2010 or thereafter.
No sooner had state lawmakers put the final touches on this new state inheritance and estate tax did congressional negotiators begin discussing re-establishing the federal estate tax. And when they did, the federal estate tax exclusion was set at $5 million. However, this change will be only temporary and will sunset again next year when the estate tax exclusion is slated to drop back down to $1 million.
With the federal law scheduled to change yet again, state lawmakers this year took the advice of an interim study group that recommended that lawmakers consider conforming to the definition of what constitutes a taxable estate for federal tax purposes and to pick up the amount of the federal estate tax exclusion as the state estate tax exclusion. Thus, the new estate tax will see the state estate tax exclusion rise from $3.5 million to $5 million. The downside of that move is that if Congress does not make any changes to the federal law, the estate tax exclusion for both the federal and state tax will drop to $1 million come next January 1.
The estate tax rates established by the new state law would impose a tax rate beginning at 10 percent on the first million dollars of taxable estate to 15.7 percent on amounts greater than $5 million of a taxable estate. Of course, this would be a taxable estate after the first $5 million of estate tax exclusion. What is curious is that the new state estate tax would apply to persons dying after January 25, 2012, the date the measure was first introduced during the 2012 session. Inasmuch as the new exclusion is much more generous than the previous exclusion of $3.5 million and that there were relatively few amendments made to the bill after being introduced, lawmakers believe that the new law will be more beneficial than the current law.
Of course, this all assumes that HB 2328, CD-1 will be signed into law. And it appears that it is not guaranteed, as one legislator decided to add a special provision to take care of some unspecified constituent.
This special provision would extend a capital gains exclusion for the capital gains realized from the sales of the fee interest in leasehold land under multifamily condominiums to associations of apartment owners or residential cooperative corporations. This exclusion had been enacted in the 2007 legislative session and was to have sunset after five years at the end of this calendar year. The provision will extend this exclusion for another five years so it would expire at the end of 2017.
No doubt this part of the bill is designed for a specific constituent who has already had the opportunity to take advantage of the tax preference but didn’t exercise the privilege in the last five years. However, because the provision represents a loss of revenues that might otherwise be realized by the state, it could just jeopardize the survival of the new state inheritance and estate tax measure.
Thus, many taxpayers may be asked to sacrifice because one legislator had to “take care” of a constituent. So much for the greater good of the community.
• Lowell Kalapa is president of the Tax Foundation of Hawai‘i, a private, nonprofit, non-partisan, educational organization established to research tax issues. Visit www.tfhawaii.org for more information.