Tax Analysts Blog

States Should Repeal Their Estate Taxes

Posted on Apr 17, 2013

There are a lot of tax reform proposals being bantered about in the states. The most notable measures center on replacing or reducing personal income taxes with expanded and higher sales taxes. But states can go a long way toward meaningful reform by repealing their estate and inheritance taxes. I have said before on many occasions that the state estate taxes are nothing more than jealousy fueled money grabs. There is very little principle involved other than “we need money, and rich dead people have it.” To be sure, there is the argument that we impose the tax because we want to prevent the familial accumulation of wealth. That idea is grounded in the dislike of the rich passing their fortunes on to their loser children who will drive BMWs and summer in Europe while the rest of us toil in our endless banality. But that is not much of a principle on which to base public finance.

Right now 21 states and the District of Columbia impose some kind of estate tax. And while the exemption at the federal level is a hefty $5.25 million, all of the states have exemptions that hit much more modest estates. New Jersey, for instance, imposes its tax on estates worth more than $675,000. Trust me, if you live in New Jersey that is not exactly Bill Gates money. Then there are the eight states with inheritance taxes – which impose the tax on the recipient of assets from the dead person. New Jersey and Maryland have both estate and inheritance taxes – which is just asinine.

Here is what is wrong with state estate and inheritance taxes. The really rich (the people we do not like because they are too successful) don’t pay it much. They have the means to plan around it because, well, they are rich. So it is the well to do, but not crazy rich who bear the burden. Upper middle class folks who have a house and 401k account can reach the threshold for paying tax very quickly. The states punish them for working hard and saving for the future. But it also punishes them for not having enough money to plan around the tax. Moreover, there are loopholes that allow even these folks to avoid some taxes. For example, I do not think any states currently have gift taxes. So if you have the wherewithal you can start giving your money away before you die. Those who do not think of giving it away, or happen to be mad at their kids at the time, don’t get that break. Then we are just taxing the ignorant or stupid rich.

Increasingly, I hear stories of relatively wealthy people contemplating moving to states that do not tax their assets upon death. These are not people with private jets or suites at Yankee Stadium. They are just people who had the good fortune to do better financially than most. Do New Jersey or Maryland or the other states with pretty onerous estate taxes really want their elderly wealthy to move? I am betting more will do so in the future. And that cannot be a good thing.

Read Comments (2)

amt buffApr 17, 2013

"They have the means to plan around it because, well, they are rich. So it is
the well to do, but not crazy rich who bear the burden."

This is true of all progressive taxes. In reality they are only progressive up
to the point where avoiding the tax becomes affordable.

In a future crisis I expect Congress to enact retroactive tax increases, in
part as an anti-avoidance measure.

emsig beobachterSep 19, 2013

Why not tax inheritances -- they are fairly neutral in their incidence? The
heirs did nothing to reap that reward except for having the good luck to born
to well to do parents and grandparents. The only facet of the inheritance that
the heirs can control is the timing of the passing of the parent and/ or
grandparent. Of course, there is a cost to get the timing correct.

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