Few taxes imposed by state and local governments are more controversial than the estate tax, popularly referred to as the death tax. Estate taxes are levies on property transferred from a deceased person’s estate to relatives or other parties. Proposals have been introduced this year that would expand Maryland’s estate tax exemption, increasing it to the level of the federal estate tax exemption, which is currently $5 million per person and is indexed for inflation.
Almost a dozen states have an estate tax exemption level higher than the federal exemption. Until 2001, Maryland’s estate tax exemption followed the federal standard. Today, however, Maryland’s exemption level is just $1 million, lower than most other states’, and it affects the estates of even some middle-income families. And Maryland is one of only two states that impose both an estate tax and an inheritance tax, making it one of the most expensive states for estate transfer.
One proposal would gradually increase over four years the size of estates exempted from the state’s estate tax. The proposal would move Maryland’s current estate tax exemption from $1 million to $2 million for people dying in 2014, to $3 million in 2015, $4 million in 2016, and finally reaching the current federal limit in 2017.
Proponents of high estate taxes say the tax creates additional revenue for government and benefits charities by increasing a person’s incentive to make charitable donations prior to death. Opponents note the estate tax is double taxation and places an undue burden on family-owned businesses and farms. Critics also note high estate and inheritance tax rates have forced many families to leave Maryland for more tax-friendly states. The Baltimore Business Journal quoted Sen. James Brochin as saying many of his constituents came to him and cited high estate taxes as a key motivator in their moves to states like Florida and Delaware.
Estate 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 completely would create jobs and promote saving and investment while not penalizing individuals who saved for the next generation. The federal government and state legislatures should consider reducing or eliminating this tax.
The following documents examine estate taxes, their effects on the economy and investment, and current proposals for reform, from multiple perspectives.
Changes to Maryland’s Estate Tax Exemption Gains [sic] Steam
http://www.bizjournals.com/baltimore/news/2014/01/15/changes-to-marylands-estate-tax.html?page=all
Gary Haber of the Baltimore Business Journal examines the two proposals to change Maryland’s estate tax exemption and reports on their chances for passage.
The Estate Tax: Even Worse Than 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 and argues the report, although an effective overview, could go even further to demonstrate the many problems created by the estate tax.
Give Maryland’s Millionaires a Reason to Stay
http://articles.baltimoresun.com/2014-01-30/news/bs-ed-estate-taxes-20140130_1_estate-tax-millionaires-maryland-legislature
David Rosen writes in the Baltimore Sun about the disincentives high estate taxes create for high-income households to stay in state. Although Maryland has the most millionaires per capita; it is unlikely to keep them without lowering its estate and inheritance taxes, Rosen observes.
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 different states and highlights several high-tax states as expensive places to die.
Maryland Death Taxes
https://heartland.org/publications-resources/publications/maryland-death-taxes
David Rosen of the Maryland Public Policy Institute examines the history of death taxes in Maryland and the state’s rare system of imposing both an estate tax and an inheritance tax.
Ten Principles of State Fiscal Policy
https://heartland.org/publications-resources/publications/ten-principles-of-state-fiscal-policy
Heartland Institute President Joseph Bast and economist Richard Vedder list the principles by which states should formulate their tax and expenditure 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 a high level of accumulated savings. These savings are invariably located in banks and investments which provide capital to the economy. Therefore, the estate tax directly violates this 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 negative effects of the estate tax are far greater than even most critics realize. The author says the estate tax has enormous negative effects on capital accumulation which equate to a loss of more than 2 percent of the U.S. GDP per year. If the tax were repealed, the economic growth would increase tax revenues by $1 trillion over the decade. Entin and Patten 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 disincentives 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 the poor and middle class, Wolfram concludes.
The Moral Case against the Death Tax
https://heartland.org/publications-resources/publications/the-moral-case-against-the-death-tax
This Cato Policy Analysis by Edward McCaffery is a primer on the basics of the death tax. It 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
https://heartland.org/publications-resources/publications/interstate-competition-and-state-death-taxes-a-modern-crisis-in-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
https://heartland.org/publications-resources/publications/the-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
https://heartland.org/publications-resources/publications/the-economics-of-the-estate-tax-an-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
https://heartland.org/publications-resources/publications/the-economic-case-against-the-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.
Straight Talk About the ‘Death’ Tax: Politics, Economics, and Morality
https://heartland.org/publications-resources/publications/straight-talk-about-the-death-tax-politics-economics-and-morality
Dennis J. Ventry Jr. of the University of California-Davis criticizes the political, economic, and moral cases against wealth-transfer taxes. Ventry argues the rhetoric surrounding the effort to repeal estate and gift taxes—particularly the charge that it destroys family farms and closely held businesses—is misleading and even disingenuous. He also argues estate and gift taxes do not threaten aggregate saving, labor supply, or economic growth as critics maintain.
How the Death Tax Kills Small Businesses, Communities—and Civil Society
https://heartland.org/publications-resources/publications/how-the-death-tax-kills-small-businesses-communitiesand-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
https://heartland.org/publications-resources/publications/growth-consequences-of-estate-tax-reform-impacts-on-small-and-family-businesses
Douglas Holtz-Eakin and Cameron T. Smith of the American Family Business Foundation examine the effects of the estate tax rate 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 and other topics, visit The Heartlander’s Budget and Tax News Web site at https://heartland.org/publications-resources/newsletters/budget-tax-news, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.
If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or [email protected].
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
