Attacks on Estate Tax Fall Flat
The new tax act signed into law last Friday contained some needed tax policy changes, including federal tax conformity measures that will simplify tax preparation and reduce middle class taxes, an increase in the Working Family Credit, and repeal of business-to-business sales taxes. However, the same act made a large and imprudent cut in Minnesota’s estate tax by doubling the estate tax exemption and modifying tax rates.
Yesterday’s Minnesota 2020 article examined the positive roll that the estate tax plays in generating revenue and promoting tax fairness. However, no discussion of the estate tax would be complete without noting conservative criticisms of the tax.
The most frequently cited attack on a state-level estate tax is that it will encourage flight of high income households to other states. There is certainly anecdotal evidence of tax flight from accountants and tax attorneys; however, the sample of the population that these professionals are in contact with is obviously skewed to include only those who are seeking to avoid the estate tax. Furthermore, it is unclear just how many high income households who seek advice on estate tax flight will actually go through the hassle and expense of relocation.
While anecdotal evidence of estate tax flight exists, a review of literature on the subject conducted by non-partisan staff at the Minnesota Department of Revenue (summarized in the Department’s recent estate tax report) notes that “Most rigorous and peer-reviewed studies of tax migration fail to find any statistically significant effects of tax variables. This is true when studies are limited to seniors, and it is true for both estate taxes and income taxes.”*
Another argument against the estate tax is that it can be avoided through elaborate legal schemes. To some extent, this is true. However, the fact that Minnesota's estate tax generated $380 million in revenue during the recently completed FY 2012-13 biennium is proof that not all of the tax can be avoided. While ultra-wealthy households may be able to avoid some of the estate tax, the elimination of the estate tax in its entirety would guarantee that they could avoid 100 percent of the tax. Ultimately, the existence of elaborate estate tax avoidance schemes is an argument for closing these tax loopholes, not for elimination of the estate tax.
Estate tax opponents further argue that the tax discourages work because the government claims a portion of the accumulated wealth upon death. This argument is a stretch, even if we make the highly unlikely assumption that the accumulated wealth subject to the estate tax was achieved strictly through “work.” The taxation of wealth at the time of death doesn’t inhibit the enjoyment of wealth accumulated prior to death. Furthermore, it is hard to see how a tax with a total effective rate of 3.1 percent (see part 1) of gross estate value is a significant deterrent to hard work and wealth accumulation in the first place.
If anything, an estate tax may create an incentive for hard work among estate recipients by reducing their ability to live passively off their inheritance. As Winston Churchill said, the estate tax is “a certain corrective against the development of a race of idle rich.”
Finally, there is the claim that the estate tax will prevent the passing of the family farm or business to the next generation. Minnesota’s generous $5 million exemption for estates consisting mostly of farm and small business property takes most of the steam out of that argument. A United for a Fair Economy issue brief notes that “The Congressional Budget Office estimates that with a $2 million exemption, only 123 farms per year in the U.S. would owe any estate tax, and the number of small businesses is similarly small. In 2001, the New York Times reported that American Farm Bureau Federation (who was in favor of repealing the estate tax) could not cite a single case of a family farm lost due to the estate tax.”
A strong case can be made for simplification of Minnesota’s estate tax. Unfortunately, the tax act recently passed into law went beyond simplification to include a significant reduction in estate tax revenue. The best thing that can be said about the estate tax provisions in the new tax act is that they are not as bad as they could have been. More on this in part three of this series.
*An American Experiment blog post is critical of the Revenue Department’s review of estate tax migration literature, citing limitations of the literature (although many of the limitations cited in the blog post were already noted in the Revenue Department report itself). However, the post from the right wing American Experiment concludes that “the empirical studies on migration do not yield much convincing evidence one way or the other,” which would seem to undermine the certainty among conservatives that the estate tax is a significant contributor to tax flight.