Few taxes imposed by state or 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. New Jersey is one of two states that impose both an estate tax and an inheritance tax, making it one of the most expensive states for estate transfer.
Reforming the estate and inheritance taxes has become a hot topic in Trenton. According to Ashlea Ebeling of Forbes.com, 13 proposals to reform these taxes are currently before the state legislature. Proponents of high estate taxes say the tax creates additional revenue for government and benefits charities by increasing the incentive to give to them before death. Opponents, however, 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 New Jersey for more tax-friendly states.
According to The Bergen Record, New Jersey collects more than $700 million per year from its estate and inheritance taxes, and the article notes this is more than what the state collects from gasoline taxes or real estate taxes. The state also sets its bar for paying estate tax lower than any other state in the nation, beginning at an estate value of $675,000, which is also far below the $5.34 million threshold for federal taxes. The estate tax is also graduated—the rates are higher for larger estates, ranging from 4.8 percent to 16 percent.
Tax rates on inheritances in New Jersey are not much better. The state’s inheritance tax rates can reach 16 percent, among the highest in the country. This tax is applied to any inheritance transferred to any person other than a surviving spouse, child, parent, grandparent, or charity. The rate also increases as the amount transferred increases, reaching 16 percent at $700,000. Several states in the Northeast, including New York and Maryland, have begun efforts to reduce their estate taxes. That would make New Jersey even less competitive and further encourage high-income citizens to leave the state.
The good news is that state senators Steve Oroho (R) and Paul Sarlo (D) propose a gradual phase-out of New Jersey’s estate tax over five years, Ebeling reports. Oroho also proposes eliminating the inheritance tax and increasing the estate tax rate threshold from the national-low $675,000 to the federal estate tax threshold of $5.34 million.
Estate and inheritance taxes are a form of double taxation that stifles investment and entrepreneurship, reduces economic growth, discourages savings, increases the cost of capital, raises interest rates, and brings in relatively little revenue. Lowering or eliminating the estate tax would create jobs and promote savings and investment.
The following documents examine estate taxes, their effects on the economy and investment, and current proposals for reform, from multiple perspectives.
NJ Legislators Trying to Make Estate Tax a Lot Less Certain
http://watchdog.org/171997/estate-tax-new-jersey/
Brad Matthews examines the legislation under consideration in New Jersey to phase out the state’s estate tax over five years.
Renewed Push to Kill New Jersey Estate Tax
http://www.forbes.com/sites/ashleaebeling/2014/09/16/renewed-push-to-kill-new-jersey-estate-tax/
Writing for Forbes, Ashlea Ebeling discusses 13 proposals under consideration in the New Jersey Legislature to reform the state’s estate and inheritance taxes.
A Push to Reform How N.J. Taxes Heirs
http://www.northjersey.com/news/a-push-to-reform-how-n-j-taxes-heirs-1.1072688
John Reitmeyer of The Bergen Record discusses New Jersey’s estate and inheritance tax system, how it works, and efforts to reform it.
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 Joint Economic Committee Republicans that criticizes the federal estate tax. Although it is an effective overview, the report could go even further in demonstrating the many problems created by the estate tax, Block and Drenkard argue.
Where Not To Die In 2015
http://www.forbes.com/sites/ashleaebeling/2014/09/11/where-not-to-die-in-2015/
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.
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 Senior Analyst Richard Vedder list the principles states should consider in conducting 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 that 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. They say the negative effects of the estate tax on capital accumulation equates to a loss of more than 2 percent of the U.S. GDP per year. If the tax were repealed, the consequent economic growth would increase tax revenues by $1 trillion over a decade, Entin and Patten write.
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. McCaffery 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 rather another step in a decades-long interstate battle to attract and retain wealthy citizens.
Straight Talk About the ‘Death’ Tax: Politics, Economics, and Morality
http://heartland.org/policy-documents/straight-talk-about-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 claims estate and gift taxes do not undermine aggregate saving, labor supply, or economic growth.
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
In this Heritage Foundation Backgrounder, Curtis Dubay details a replacement for the death tax and argues Congress should repeal the tax immediately.
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’s Backgrounder, Patrick Fagan argues the death tax is a direct assault on a community’s economy, undermining small business, a primary source of sustenance for communities.
Growth Consequences of Estate Tax Reform: Impacts on Small and Family Businesses
http://farmweeknow.com/mdfm/Fareek3/author/33/economic_impacts_of_estate_tax_reform_9-13-10%5B1%5D.pdf
Douglas Holtz-Eakin and Cameron T. Smith of the American Family Business Foundation examine the effects of a higher 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 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 Web site of Budget and Tax News at http://news.heartland.org/fiscal, The Heartland Institute’s Web site at www.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 Logan Pike, 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.
