Democrats and Republicans may not agree on much, but most fair-minded Americans share the view that the death tax is unwise, outdated and counter-productive. Considering how economically damaging and inefficient it is, it’s no wonder the death tax is so unpopular. While Congress remains gridlocked on the future of this ghoulish tax, the good news is at the state level, many legislatures and governors are working together to drive a stake into the heart of their own misguided death taxes.
The federal death tax confiscates more than 40 percent of a person’s estate over $5.34 million instead of transferring it to his or her loved ones. Currently, 21 state governments assess death taxes of their own, in addition to the federal tax.
The burden of this tax falls throughout the income spectrum. While it is often discussed as a tax paid largely by top earners, households in the middle of the income spectrum feel its impact, particularly families that have farms or run their own businesses. Small businesses and family farmers have to have to close their doors instead of passing ownership to the next generation because they face a steep death tax bill.
One of the biggest problems of the death tax is how it discourages savings and wealth accumulation. It provides people with a strong incentive to spend money instead of saving and investing it over the course of their lifetime. This shrinks the amount of capital available in the economy to invest. The Joint Economic Committee estimated that the death tax has caused the economy to lose $1.1 trillion in capital stock, meaning lost jobs and slower growth.
Getting rid of the death tax would be a boon for the economy. Former Congressional Budget Office Director Douglas Holtz-Eakin concluded that a repeal would create almost 1 million jobs. Furthermore it could mean $119 billion to GDP and increase workers income by $79 billion. This would be a welcome change from the sluggish growth we’re currently facing.
While American families and businesses face significant costs under the death tax, the government sees very little benefit in terms of revenue. The death tax produced only one-third of 1 percent of federal revenues in 2012, according IRS data. In fact, the compliance costs related to the death tax far exceed the revenue it produces—$26 million in compliance costs, compared to only $8 million in federal revenue.
State economies are particularly affected because they see their residents fleeing for more attractive tax climates. Maryland, which up until recently had one of the worst death taxes, saw its residents leave in scores for Virginia, which doesn’t have a death tax.
It’s unsurprising, then, that we see movements at the state level to roll back the death tax. States that recently abolished their death tax include Kansas, Ohio, Oklahoma and North Carolina. And this movement isn’t limited to traditionally red states. In fact, progressive governors in deep blue states are also following their example. Gov. Andrew Cuomo in New York just signed a tax reform into law that brings the estate tax rate down to 10 percent and increases the exemption to $5.25 million. Also, Gov. Martin O’Malley in Maryland is poised to sign legislation bringing rates down to 10 percent and also increasing the exemption to more than $5 million.