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Sunday, March 25, 2012

WSJ: Estate Tax Repeal Momentum Builds in the States

Weekend Wall Street Journal editorial, Death Tax Defying: Estate Tax Repeal Gains Momentum in the States:

While Washington continues to debate what to do with the federal death tax—the top rate is now 35% and is scheduled to rise to 55% next year—states are starting to recognize that their high estate taxes are a good way to chase away wealth producers.

Last year Ohio abolished its estate tax, joining the 28 other states that do not impose such a tax at death. Indiana's legislature recently passed by big margins a bill to phase out its death tax by 2021, and Governor Mitch Daniels signed it this week. Heated debates are going on in Tennessee and Nebraska over the issue. Even in Oregon taxpayer groups are attempting to put an initiative on the November ballot to abolish the death tax, and polls show it could win.

The left has long been flummoxed by polls showing that roughly two of three Americans want this tax abolished. Why would Americans oppose a tax that politicians say is aimed at the top 1%?

The answer is that Americans instinctively understand that the tax is unfair. It punishes a lifetime of thrift and investment solely due to the accident of death. And it does so in a way that imposes another tax on income that in most cases has already been taxed once, or sometimes twice. ...

[E]ven on purely economic grounds, death taxes are spectacular failures as revenue raisers or a tool of income redistribution. This is because the people who are subject to these taxes often move across state borders to avoid paying. They do this so they can pass businesses and property to their children and grandchildren. ...

A November 2011 study of tax return data by economists Arthur Laffer and Wayne Winegarden [The Economic Consequences of Tennessee’s Gift and Estate Tax] shows how people avoid state death taxes. The study compared Florida and Tennessee high-income returns. Both states have no income tax, but Tennessee is one of only two states that imposes an estate and a gift tax. (Connecticut is the other.) ...

The authors point out that this year there is a $5 million exemption on the federal estate tax and gift tax (a once-in-a-lifetime wealth transfer for the living), but in Tennessee the exemption is a meager $13,000 for estates and gifts. With a gift and death-tax rate that reaches 9.5%, a Tennessean with a $5 million estate would pay $462,000 more estate tax than someone living in the 29 states with no such tax, such as Florida. Tennessee is a very expensive state to die in.

The Tennessee tax really does cause the rich to flee. The authors found that in 2010 Florida had nearly twice as many federal tax returns with taxable estates (per 100,000 population) as did Tennessee. The average estate is also larger in Florida—$7.4 million versus $4.4 million in Tennessee.

Here's the kicker: Because wealthy people avoiding the estate tax take their businesses and spending with them, the study concludes that "had Tennessee eliminated its gift and estate tax 10 years ago, Tennessee's economy would have been over 14% larger in 2010." They also find the estate tax cost Tennessee state and local governments over $7 billion in tax collections. Could there be a more self-defeating tax?

With Ohio and Indiana zeroing out their estate taxes and others likely to follow suit, the remaining high-rate states will have an increasingly hard time holding onto their mobile high-income citizens as they get older.

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Comments

The Ohio tax has been very good for Florida, as business owners discover they can use the Internet and cell phone to keep in touch with hired managers back in the rustbelt.

Posted by: save_the_rustbelt | Mar 25, 2012 6:51:21 AM

Any study by Arthur Laffer can indeed be called a "Laugher" study.

Posted by: David R | Mar 25, 2012 9:13:38 AM

I am against the estate tax but the authors of this didn't do any real research. There is a $1,000,000 exemption for estate taxes in Tennessee - not $13,000. A person dying with a $5,000,000 estate would pay $368,000 not $462,000. A person with a million $ estate would pay nothing.
To compare the assets & number of taxable estates in Florida to Tennessee is a real "laugher" Makes you wonder how sloppy the rest of the article is if they couldn't get two paragraphs right - particularily two used to make their point.

Posted by: axelhose | Mar 26, 2012 12:46:38 AM

"the study concludes that "had Tennessee eliminated its gift and estate tax 10 years ago, Tennessee's economy would have been over 14% larger in 2010.""

The left sees this as a feature, not a bug. It has undoubtedly promoted equality by getting rid of many of the wealthy people.

Posted by: laka | Mar 26, 2012 4:45:28 AM

Any debater who addresses the person who puts forth an argument rather than the substance of the argument itself, loses the debate.

Posted by: TomB | Mar 26, 2012 4:48:55 AM

"the study concludes that "had Tennessee eliminated its gift and estate tax 10 years ago, Tennessee's economy would have been over 14% larger in 2010." They also find the estate tax cost Tennessee state and local governments over $7 billion in tax collections. Could there be a more self-defeating tax?" Barry's not concerned about the bottom line! Is it "fair" in his mind? Rich should pay their "fair" share!

Posted by: moron | Mar 26, 2012 5:09:44 AM

I recall that in the 1970s, the New York State legislature in it's great wisdom passed a big increase in estate taxes on "large" estates. Soon afterward it was whispered in the legislature's "collective" ear (pun intended), that almost those people whose estates were affected by the tax increase have more than one home and that second/third home is almost always in another state. With a collective "oops", the increase was quickly repealed. I'm sure a number of the those individuals went ahead and changed their official residences anyway.

Posted by: tripleforte | Mar 26, 2012 5:39:21 AM

Actually, Tennessee's transfer tax system is more "mommocked up" (as we say) than this. For starts, there is no unified credit so the gift and inheritance taxes aren't linked. In fact, any gift tax you paid on transfers within three years of death gets dragged back into your estate (as do the transfers themselves). Further, unlike the feds, for gift taxes Tennessee cares about the donor-donee relationship. The annual exclusion from taxable gifts for Class A donees (spouses, lineal ancestors and descendants, and children-in-law . . . but not spouses of other lineal descendants) is pegged to the federal annual exclusion. For Class B donees (everyone else) you're allowed to give up to $5,000 per year to all of them, but as soon as you give over $5,000 to the group, anything you've given over $3,000 to any individual is taxable. The Class B limits aren't indexed to anything. In addition to its inheritance tax, it also has an "estate tax" which picks up any amount by which the federal credit for state death taxes exceeds the inheritance tax lick. A couple of helpful aspects about Tennessee's death taxes are the fact that they use an exemption instead of a credit, so the tax savings are at the top of the bracket structure instead of the bottom, and Tennessee doesn't tax the value of land which is not located in Tennessee or tangible personal property not physically located here, even if the decedent is a Tennessee domiciliary.

Posted by: Countrylawyer | Mar 26, 2012 6:10:39 AM

"There is a $1,000,000 exemption for estate taxes in Tennessee - not $13,000. A person dying with a $5,000,000 estate would pay $368,000 not $462,000."

This is supposed to refute the argument?

"Hey, people in Tennessee really get hosed SLIGHTLY less than the author says."

Sheeesh.

Posted by: Chester White | Mar 26, 2012 10:41:54 AM

Chester, That comment was not to disprove that the good people of Tennessee get "hosed" It was to suggest that the author of the article started with their own conclusion and grabbed at any "fact" to prove it. As I stated, I'm against the estate tax period. But actually in many cases the Tenn estate tax would be less than the $368,000 if the estate was a family owned business. There are allowances for minority interest and valuation discounts.If you have $5 million of assets, how is a couple hundred thou paid to the state getting "hosed"? The author of the article goes on to say that Tennessee spends more to collect the tax than it gets. That's absurd! There are at most 5 managers in the gift & inheritance tax section. I don't think their annual expense (even loaded) would approach $14 million. All I'm saying is that journalists don't know %$^& and try to force their opinions on everyone else using half-truths and false facts.

Posted by: axelhose | Mar 26, 2012 1:54:53 PM