Pick-Up Tax (Sponge Tax)
The term pick-up tax refers to a state-level estate tax based on credits taken on a federal estate tax return. Pick-up taxes do not result in an increase or decrease to the amount of estate taxes due. They are a mechanism that allows for states to share in the revenues generated by estate taxes.
Also known as a sponge tax, a pick-up tax is levied at the state level. The amount of taxes owed is based on the estate tax credit allowed on a federal estate tax return. Since this taxing mechanism relies on federal estate tax credits, a pick-up tax is only collected when the size of the estate exceeds federal threshold values. Since the tax is collected at the state level, the amount owed will vary from state to state.
The intent of this tax was not to further burden taxpayers with additional estate taxes. It was a mechanism for states to share in the revenues associated with estates, which is how they came to be known as “pick-up” taxes. The total amount of tax owed did not increase due to the pick-up tax; the revenues were simply divided between the state and federal government.
Then-existing state-level pick-up taxes were phased out by the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001. However, when faced with the repeal of this tax, some states enacted new laws that allow them to continue collecting an estate tax. As of August 2014, the following states collected estate taxes: Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Rhode Island, Tennessee, Vermont, Washington, as well as the District of Columbia.