Few taxes are more controversial than the estate tax, popularly referred to as the death tax. Death taxes are levies on property transferred from a deceased person’s estate to relatives or other parties. Delaware’s death tax is graduated, maxing out at 16 percent for estates valued at $10,040,000 or more. It applies not only to Delaware residents but also to other estates that own valuable real estate or other tangible assets in the state. The first $5.43 million in estate value is exempt from Delaware’s estate tax as well as from the federal estate tax.
When Delaware’s estate tax was introduced in 2009, supporters claimed it would generate annual revenue of $25 million for the state. Revenues have fallen far short of that forecast, generating only $1.3 million in fiscal year 2014.
In the original law, the tax was set to sunset on July 1, 2013, but the state legislature repealed the sunset provisions in March 2013. Legislators are currently considering repealing Delaware’s death tax, arguing it has cost the state more revenue than it has created because it is driving wealthy residents and their high-income tax payments out of the state. The repeal proposal follows recommendations made by a state panel formed by Democratic Gov. Jack Markell.
Proponents of the estate tax say it creates additional revenue for government and benefits charities by increasing people’s incentive to make charitable donations prior to death. Opponents note the tax is double taxation and places an undue burden on family-owned businesses and farms. These taxes have forced many families to leave high-death-tax states for lower-taxed states.
The Delaware-based Caesar Rodney Institute says the estate tax was from the very beginning a shortsighted effort that ignores Delaware’s larger tax problems: “With the troublesome rush to enact the new estate tax and the lack of understanding about the legislation, it is likely that this was just another stop-gap measure to meet the state’s budget deficit. And the fact remains that implementing this tax is another band-aid that is part of the lingering foot-dragging that puts off holistic government reform.”
Death taxes are a form of double taxation that stifles investment and entrepreneurship, reduces economic growth, discourages saving, increases the cost of capital, raises interest rates, and brings in relatively little revenue. Lowering the estate tax or eliminating it entirely would create jobs and promote saving and investment while not penalizing individuals who saved for the next generation.
The following documents provide additional information about estate taxes, their effects on the economy and investment, and current proposals for reform.
The Tax is Up … But How Much?
https://heartland.org/policy-documents/tax-how-much
The Caesar Rodney Institute argues Delaware’s estate tax is a form of double taxation that stifles investment and reduces economic growth while bringing in relatively little revenue.
The Estate Tax: Even Worse than Republicans Say
http://heartland.org/policy-documents/estate-tax-even-worse-republicans-say
David Block and Scott Drenkard of the Tax Foundation examine a report by Republicans on the Joint Economic Committee that criticizes the federal estate tax. They say the report, although an effective overview, could go even further to demonstrate the many problems created by the estate tax.
Where Not to Die in 2014: The Changing Wealth Tax Landscape
http://www.forbes.com/sites/ashleaebeling/2013/11/01/where-not-to-die-in-2014-the-changing-wealth-tax-landscape/
Writing in Forbes, Ashlea Ebeling compares the estate and inheritance taxes of states and highlights several high-tax states as expensive places to die.
Ten Principles of State Fiscal Policy
http://heartland.org/sites/all/modules/custom/heartland_migration/files/pdfs/19354.pdf
Heartland Institute President Joseph Bast and economist Richard Vedder list the principles states should follow in formulating their tax and spending policies. Especially relevant to the estate tax are the first two principles: keep taxes low, and don’t penalize earnings and investment. The estate tax is designed to extract wealth from families with substantial accumulated savings. These savings are invariably located in banks and investments that provide capital to the economy. The estate tax directly violates the second principle and hinders economic production and prosperity.
To Reduce the Deficit, Kill the Estate Tax
http://www.forbes.com/sites/realspin/2011/10/25/to-reduce-the-deficit-kill-the-estate-tax/
Stephen Entin and Dick Patten argue the damage done by estate taxes is far greater than even most critics realize. The estate tax radically impedes capital accumulation, resulting in a reduction of more than 2 percent of the nation’s GDP per year. The economic growth unleashed by repeal of the tax would increase tax revenues by $1 trillion over a decade. The authors cite Nobel Prize-winning economist Milton Friedman for the theoretical groundwork for their argument.
Econ 101: Is the Estate Tax Good or Bad?
http://www.mrc.org/commentary/econ-101-estate-tax-good-or-bad
Economist Gary L. Wolfram of Hillsdale College lays out a simple economic argument against the estate tax: It discourages savings and increases consumption by wealthy individuals. In the long run, he notes, this pattern reduces economic productivity and slows economic growth. Despite targeting the wealthy, the estate tax primarily hurts poor and middle-income households, Wolfram concludes.
The Moral Case against the Death Tax
http://heartland.org/policy-documents/moral-case-against-death-tax
This Cato Policy Analysis by Edward McCaffery is a primer on the basics of the death tax. McCaffrey finds the tax fails to achieve most—and quite possibly any—of the objectives its supporters promote.
Interstate Competition and State Death Taxes: A Modern Crisis in Historical Perspective
http://heartland.org/policy-documents/interstate-competition-and-state-death-taxes-modern-crisis-historical-perspective
Jeffery Cooper of the Quinnipiac University School of Law argues the current decline of state death taxes is not an isolated modern event but instead another step in a decades-long interstate battle to attract and retain wealthy citizens.
The Federal Estate Tax: History, Law, and Economics
http://heartland.org/policy-documents/federal-estate-tax-history-law-and-economics
David Joulfaian of the U.S. Department of the Treasury traces the evolution of the estate tax since its enactment. He provides a brief legislative history and description of the structure and features of the tax, then reviews the fiscal contribution of each of the estate and gift taxes. He also identifies trends in the number of individuals and households affected by the tax as reflected by the number of returns filed over time, and he provides a comprehensive review of the behavioral effects of the tax.
The Economics of the Estate Tax: An Update
http://heartland.org/policy-documents/economics-estate-tax-update
Daniel Miller of the Joint Economic Committee examines the arguments for and against the federal estate tax and concludes it generates costs to taxpayers, the economy, and the environment that far exceed any potential benefits it might arguably produce. The paper updates a previous Joint Economic Committee report on the federal estate tax.
The Economic Case against the Death Tax
http://heartland.org/policy-documents/economic-case-against-death-tax
This Heritage Foundation Backgrounder by Curtis Dubay argues Congress must kill the death tax and explains increases in capital gains and income taxes paid by heirs would more than compensate for any lost revenue while strengthening the economy.
How the Death Tax Kills Small Businesses, Communities—and Civil Society
http://heartland.org/policy-documents/how-death-tax-kills-small-businesses-communities-and-civil-society
Writing for the Heritage Foundation Backgrounder series, Patrick Fagan argues the death tax makes a direct assault on a community’s economy by undermining small business, a primary source of sustenance for communities.
Growth Consequences of Estate Tax Reform: Impacts on Small and Family Businesses
http://heartland.org/policy-documents/growth-consequences-estate-tax-reform-impacts-small-and-family-businesses
Douglas Holtz-Eakin and Cameron T. Smith of the American Family Business Foundation examine the effects of the estate tax on asset accumulation, small and family businesses’ cost of capital, investment outlays, desire to hire, size of payrolls, and jobs. In each instance, raising the estate tax rate does significant harm.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Budget & Tax News at https://heartland.org/publications-resources/newsletters/budget-tax-news, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database at www.policybot.org.
The Heartland Institute can send an expert to your state to testify or brief your caucus, host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact MaryAnn McCabe, Heartland’s state government relations manager, at [email protected] or 312/377-4000.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.