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John Taylor,
President of the Virginia Institute for Public
Policy, publisher of Virginia Viewpoint
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By
Stephen Moore
For
those who thought that the onerous federal estate
tax will soon be repealed, get ready for this cruel
and costly hoax: In 20 states the death tax will
actually go up, not down next year. In fact, under
the new tax bill signed into law by President Bush,
the 50 percent death tax rises to 56 percent in
2003, 60 percent in 2004, and 55½ percent in 2005.
Gee, that’s some relief!
What’s
going on here? It turns out that in order to “pay
for” the tax cut, Senate Democrats added two
devilishly devised amendments to the tax bill to
ensure that few Americans will actually face a lower
estate tax. The first of these provisions is by now
common knowledge to most Americans. In 2010 the
hated graveyard tax is fully repealed. In 2011, the
tax comes back to life and is reinstated at a
confiscatory rate. So real death tax repeal is
available only for those who, through the cleverest
of estate tax planning, have scheduled to meet their
maker in 2010, and not a day before, or after. Some
people are calling this the “Throw Mamma From the
Train” death tax bill.
But
for those who die in 2003, 04, or 05, the scam is
especially expensive. In Virginia and 19 other
states – representing roughly half the U.S.
population – the death tax rate will go up, not
down under the new federal estate tax law. This is
because the Senate Democrats insisted on phasing out
something called the state death tax credit in order
to “pay for” the tax cut. This tax credit
encouraged states to impose a 16 percent estate tax
of their own, because every dollar raised from the
tax would come out of the coffers of the federal
government, not the dead man’s estate. This meant
that states could impose a 16 percent estate tax at
no cost to their citizens. So twenty states did just
that. But through a quirk in the new law, the tax
credit is eliminated at a faster pace than the tax
rate is cut.
A
simple example may help explain. Assume that an
estate in Virginia
owed $1 million of tax. Under the old law, the total
tax is 55 percent and the federal government
receives 39 percent or $390,000 and the state
receives 16 percent or $160,000. Now let us say that
it is 2004 and we have the same $1 million estate.
Now the total federal estate tax is down to 48
percent (the good news), but the state credit is
down from 16 percent to 4 percent (the bad news).
Hence, the federal government would get $440,000 (48
percent minus the 4 percent credit) and the state of
Virginia, still imposing its 16 percent tax, would take
$160,000. The total tax is now $600,000, up from
$550,000 under the old law.
Two
things must happen to rectify this injustice. First,
Congress must immediately fix last year’s tax law
by ending or at least delaying the phase-out of the
state credit. Since many states and cities are now
facing multi-billion dollar deficits, this isn’t
an ideal time for the federal government to be
imposing new costs on the states. In fact, it is
ironic that many of the same Democratic Senators and
left-wing special interest groups who deplore the
repeal of the death tax argue that it will unfairly
“cost” the states some $5 billion in lost
revenues. But these are many of the same folks on
Capitol Hill who insisted at a time of state fiscal
crisis, that the death tax credit should be
repealed. If the credit reduction were delayed for
three years, the problem of higher estates taxes
would be entirely alleviated in every state.
The
second solution is for Virginia
to start the necessary process of eliminating its
own estate taxes, which have now been rendered
obsolete and onerous. The estate tax is no longer
“free” money that can be piggybacked off the
federal system. As the federal government gradually
eliminates the death tax and the death tax credit,
the money the states receive from their own
inheritance taxes will come directly out of the
estates of their residents.
Virginia
voters aren’t likely to tolerate a 16 percent
death tax, when they can move to Tennessee, West Virginia, or thirty-four other states and pay nothing at
all. No rational person with even modest amounts of
wealth would live in a state with a 16 percent death
tax penalty. In fact, even the most liberal states
in the nation, such as Massachusetts and Vermont, do
not impose their own inheritance taxes (above the
federal credit amount), precisely because the
politicians know that this would cause a flight of
wealth across their borders, and therefore the
higher inheritance tax would wind up losing the
state more money than it gains.
Republicans
in Congress — including Sen. Phil Gramm of Texas
and Rep. Jennifer Dunn of
Washington
-- are working heroically to make the death tax
repeal permanent. They argue compellingly that it
makes no sense for the death tax to rise from zero
to 55 percent. But 43 Senate Democrats (and John
McCain) blocked Sen. Gramm’s amendment and voted
with Tom Daschle for precisely that. Republicans
will bring this up again, and next time they should
include a provision to delay the state tax credit
phase-out.
Meanwhile,
several governors have proactively pledged to lower
their own estate taxes in response to the action of
Congress. That’s wise. Death tax repeal is
supported by roughly seven of 10 voters. These
Americans aren’t going to be too pleased with
Congress or their state lawmakers when they discover
that the estate tax is going up not down over the
next several years. And states that refuse to lower
their own estate taxes may soon learn a painful real
life lesson in the Laffer Curve: You can’t tax
wealth that isn’t there.
--
October 28, 2002
Stephen
Moore is an economist at the Cato Institute and a
senior fellow at the Virginia Institute for Public
Policy, an education and research organization
headquartered in Potomac Falls.
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