A Sure-Fire Formula for Chasing Away Affluent Retirees

Source: Tax Foundation

by James A. Bacon

Once upon a time, the Commonwealth had an “estate” tax (paid by the estate of a person upon his or her death) like many other states, but changes in federal law effectively repealed it in 2007. There has been no serious move to reinstate the tax in Virginia until this year. Now Sen. Scott Surovell, D-Mount Vernon, and Del. Vivian Watts, D-Alexandria, propose to reimpose the tax with exemptions for closely held businesses. (See Hans Bader’s description of the tax here.)

It’s hard to know how seriously to take the prospect of a death tax in Virginia. Are Surovell and Watts off in left field, all by themselves, or is there quiet by widespread support for their idea? We’ll find out as the 2020 General Assembly session rolls on. In the meantime, it’s not too early to begin discussing the pros and cons of the tax.

I acknowledge that the death-tax debate cuts many ways. As a libertarian-leaning conservative, I am uncomfortable with the idea of an aristocracy of wealth perpetuating itself through inheritances. But I’m even more uncomfortable with the idea of social-engineering zealots deciding who gets to keep their wealth, and how much they get to keep. Those moral questions are interesting but, to my mind, secondary to the practical, real-world impact on wealth creation and the generation of tax revenue here in Virginia.

Here’s the bottom line: As long as the United States is a federal system of 50 states, the states will compete to attract wealthy people, the jobs they create, and the tax revenues they generate. A death tax in Virginia would incentivize wealthy residents to relocate to states that have no death tax.

How strong will that incentive be? Well, it depends in large part upon a person’s age and career stage. A corporate CEO will not resign his job and move to Florida to avoid a death tax, not as long as he is a CEO at least. A small business owner will not move, unless he can relocate his business along with him. For people still participating in the workforce or otherwise engaged in business, the bonds of business relationships are much stronger than worries about a death tax 20 or 30 years down the road.

But retirees are a very different matter. Retirees are free to move anywhere they want. Many wealthy Virginia retirees have second homes — typically in Florida, which has neither an income tax nor a death tax — and they have the means to move their tax residences there. The wealth of many retirees typically consists of stocks, bonds and other portable assets that they can take with them. The barriers to moving one’s tax residence are extremely low.

The predictable consequence of a death tax would be an increased out-migration of affluent retirees from Virginia. We would lose their spending impact on the local economy. We would lose some or all of their philanthropic contributions to the community. And we would lose their state/local tax revenue.

Any revenue gain to the Commonwealth from death taxes would be offset to some degree by the loss of income tax revenue, sales tax revenue, and other revenues of lesser importance. At the same time, affluent retirees demand almost nothing in the way of government services. They don’t require Medicaid or other social services.  Their children are already grown and don’t attend public schools or universities. In a cost vs. revenue calculus, affluent retirees are the most desirable citizens — desirable because they are the most “profitable” citizens as measured by the difference between what they contribute in taxes and demand in services. It would be utter folly to chase them away with an estate tax.

If legislators are serious about pursuing this idea, they should, at a bare minimum, engage a reputable econometric firm — or two, or three — to measure the economic, philanthropic, and tax impacts of such a law. There could be no greater folly than to enact a death tax without understanding the likely consequences.

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14 responses to “A Sure-Fire Formula for Chasing Away Affluent Retirees”

  1. LarrytheG Avatar

    RE: “changes in federal law effectively repealed it in 2007″


    ” Who Is Subject to the Federal Estate Tax?
    The estates of each and every U.S. citizen are subject to the federal estate tax, but very few estates actually have to actually pay it because of the exemption. The Internal Revenue Code effectively gives each U.S. citizen this “coupon” to apply against the value of their estates.

    The exemption was $3.5 million in 2009, increasing to $5 million in 2010 and 2011. It went up to $5.12 million in 2012, then to $5.25 million in 2013. By 2014, it was up to $5.34 million, then it increased again to $5.43 million in 2015 and to $5.45 million in 2016 before reaching $5.49 million in 2017.

    The exemption hiked up to $11.18 million in 2018, increasing to $11.4 million in 2019.”


    So if you set a similar exemption for Virginia – will many retirees actually move?

    I sorta think once someone’s assets hit even just a few million – they are already hiring a tax expert to advise them on how best to keep it away from Uncle Sam and give to heirs.

    I thought Dick said that bills have to have Fiscal Impact Statements?

  2. Dick Hall-Sizemore Avatar
    Dick Hall-Sizemore

    The Dept. of Taxation does prepare FIS for such bills. But, they are not instant. It takes time to prepare these things and a mountain of bills have already been introduced.

    As far as chasing rich people away, retired folks move to other states for a variety of reasons: warmer weather, to be near grandchildren, etc. It may be difficult to correlate migrations with the existence/nonexistence of the estate tax. But, I think consulting with an econometric firm is a good idea. The question is who would pay the consulting fee?

  3. Surely an economic loser for any state which institutes it alone (needs to federally mandated), and without elimination of other taxation layers.

    Imagine the draw for much of the population if Virginia were a state with no income tax, no property tax, or no sales tax? I’ll take a tax on what I have left at death any day over those I have to submit constantly, every day I am living.

    1. Not sure, but I *might* have room in my heart for reasonable death tax if we could get rid of or greatly reduce car tax.

      1. Oh, there would have to be far more significant taxation eliminations to make me accept this. An overall of tax policy would be needed, mainly reducing income tax, for me to find this acceptable.

  4. Reed Fawell 3rd Avatar
    Reed Fawell 3rd

    “I’ll take a tax on what I have left at death any day over those I have to submit constantly, every day I am living.”

    You might, but many many other people of means feel far differently, and their leaving imposes huge losses on their communities and state, as Maryland has experienced for one of some many examples, and of course there are ways to game the system too.

    But the most important loss of all is the human cost – the loss of a community’s elders, it’s critical source of stability, wisdom, knowledge, experience, and learning.

    The loss of still vibrant fathers and mothers, grandmothers and grandfathers, uncles and aunts, and “bosses” and social leaders, will devastate a community over time.

    A society that runs off its elders, and ignores or aborts most of its children, is a deeply immoral and doomed society. Thus, our collapsed birthrate, and our collapsing and sick culture.

    1. Reed Fawell 3rd Avatar
      Reed Fawell 3rd

      One example of this great loss to a community when you chase off its elders and their wise independent voice, is that that community goes silent on vitally important issues and trends that might then be able to destabilize and destroy the community.

      Perhaps this helps to answer the question Jim asks in his nearby post “Where’s the Voice of Business?”

      1. Absolutely in agreement, @ReedFawell3rd, I have no interest in seeing Virginia stand alone in such a measure, to its own great disadvantage. In fact, I’d like to see the Commonwealth work harder to lure retirees. Charlottesville has now priced itself out of the realm for middle class retirees, but how about Harrisonburg competing with NC and SC towns? Richmond MSA? Fredericksburg?

        1. Reed Fawell 3rd Avatar
          Reed Fawell 3rd

          Yes, it is really odd, is it not. Just when Virginia, thanks to a relative few in government, is entering into an era of great promise, some newly in power come along seemingly intent on ruining all that potential that others have created, like for example, Virginia becoming a new magnet for retirees flooding into the state, or staying there given its new found promise.

          One senses that these leftist smell money growing in citizens pockets and want to make sure they divert it into their own pockets using their new found government power. Of course this only ruins everyone else’s future, creating nothing but dysfunction, and even more polarization between groups.

  5. Cigarunner Avatar

    The state death tax paid is counted toward Federal Tax burden.

  6. Steve Haner Avatar
    Steve Haner

    Two key points: Revenue from this proposed change is not assumed in the introduced state budget, so that will make it easier to kill or delay. And there is no indication this is something the Governor is asking for, even though the House patron (Watts) is the chair of House Finance. If it were anybody but Watts I’d say ignore this, but she is the chair now. She is the one who got the Pease Limitation restored in VA. Tax pros know what I’m talking about…if she could talk a Republican majority into that, she might pull this off, too.

    1. LarrytheG Avatar

      Any chance of getting you to explain the Pease Limitation to us unwashed?

  7. LarrytheG Avatar

    being a cynic – I wonder how much of this is a starting bid expecting a negotiation for something less – but more than was had before…..

    I would imagine more than a few “skeptics” would want to see a fiscal impact statement to see if it really will run off more people paying other taxes as well, than new revenue coming in.

    The “anti” folks are, of course, going to use every argument in the book to spook folks… so a good old fashioned impact study is needed.

    And actually, I wonder what such a study would show for the minimum wage. Yes, we got “studies” out the wazoo from the “anti” think tanks but would a more objective study confirm the “anti” claims?

  8. TooManyRegulations Avatar

    This doesn’t have anything to do with preventing aristocracy. Any aristocrat already has their tax avoidance strategies in place.

    The folks that get stuck are owners of smaller companies, usually still working and can’t pick up and leave to avoid the tax. I believe Death Taxes are intended to force privately held businesses to sell (to the “aristocracy” (the people / funds / investors with cash ready to buy at a fire sale)).

    At least, that was my experience when I dealt with a few of these cases many, many years ago. Usually the first phone calls were from decedent’s banker offering business brokage services.

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