Shopping for the best deals is an American obsession. Now, wealthy older people may be shopping for the best states to die in—those without estate taxes.

Losing those well-heeled residents could hurt states. But if Congress permanently repeals the federal estate tax, they will also lose the revenue returned to them from that tax. They may have little choice but to levy estate taxes on their own, as 17 states and the District of Columbia are already doing.

That can be a risky strategy, if it prompts rich people to move to a state without estate taxes. “Throwing away any source of revenue is problematic,” says Leonard Burman, co-director of the Urban Institute and the Brookings Institution’s Tax Policy Center in Washington, especially at a time of “severe pressures” on state budgets to pay for Medicaid and other social services.

Until recently, all 50 states piggybacked on the federal estate tax, raising revenue from the arrangement without having to impose the tax on their own. In 2001 Congress passed a law gradually reducing the estate tax, costing the states billions in lost revenue—$6 billion in 2003 alone. The law calls for eliminating the federal estate tax entirely in 2010, then reinstating it in 2011. Permanent repeal has been approved by the House and is pending in the Senate.

Many programs funded with federal money are under the ax as the government tries to bring down the deficit. The administration’s 2006 budget calls for saving $10 billion over the next four years from Medicaid, the federal-state program that covers medical and long-term care for 52 million low-income adults and children. For governors who are scrambling for ways to reduce their ballooning Medicaid costs, losing the revenue from federal estate taxes, though it accounts for only 1 to 2 percent of their budgets, further compounds their financial problems.

Current estate taxes affect only about 2 percent of taxpayers, says Clare Hushbeck, an economist for AARP. “But they’re part of an overall mix of taxes that makes for sound fiscal policy.”

The Center on Budget and Policy Priorities, a Washington research organization, estimates that estate taxes will generate $2.3 billion next year for the 17 states that imposed them. The states that don’t collect the taxes will lose an estimated $4 billion to $5 billion in 2005.

This is not an auspicious time for states to impose an estate tax, at least not while Congress is repealing one, says Kathleen Hunter of Stateline.org, a website funded by the Pew Charitable Trusts. “The political ramifications are that this is seen as a ‘new tax,’ ” she says.

Sen. Charles Schumer, D-N.Y., and Sen. Jon Kyl, R-Ariz., are trying to find a compromise in the Senate that could fall short of full repeal but would still minimize the estate tax. Republicans have suggested exempting all estates from the tax except those worth more than $10 million. But Democrats say the proposal essentially amounts to a repeal because so few estates would be taxed.

A full repeal would be fine with William Beach, director of the Heritage Foundation’s Center for Data Analysis in Washington. “The ‘death’ tax,” he says, “appears to many people as a clear contradiction to a central promise of American life: that if you work hard, save and live prudently, you will be assured the enjoyment of your economically virtuous life.”

John Rother, AARP director of policy, disagrees. “Total estate tax repeal would reward the few who didn’t work for their wealth at the expense of everyone else,” he says. “We would face higher deficits and higher taxes to make up for the revenue loss from those very large estates.”