Death Tax Proposed for Virginia

by Hans Bader

Lawmakers in both houses of Virginia’s legislature have proposed an estate tax. That’s a tax on what residents own at the time of their death. The proposed tax, set at hefty rates not seen since the 1970s, would affect the inheritances of many middle-class people.

Virginia had an estate tax until July 2007, when the Republican-controlled legislature allowed it to be effectively repealed. But this year, the Democrats took control of both houses of the Virginia legislature. And two Democratic lawmakers promptly proposed reinstating and increasing the estate tax, to a higher level than in 2007.

The tax is contained in two bills: SB 637, proposed by Sen. Scott Surovell, D-Mount Vernon, and HB 736, sponsored by Del. Vivian Watts, D-Alexandria.  (The bills would exempt “closely held businesses” to avoid decimating small businesses on the owner’s death.)

The tax is not set to the level of 2006 or 2007, when few American estates were even subject to the death tax, and tax rates were not at their peak. Instead, it would be set as it was back in the 1970’s, when estate taxes were at their most burdensome and affected the largest number of middle-class households.

The tax is set as equal in size to a “federal credit” that was allowed for state taxes “by § 2011 of the Internal Revenue Code as it existed on January 1, 1978.” Why 1978? As you can see from figure F of this IRS publication, the estate tax peaked in that part of the 1970’s, affecting many (although not most) middle-class people — a higher percentage of Americans than at any other time in history.

The tax is supposedly for “healthcare purposes.” You might wonder, does Virginia even need this tax to pay for healthcare? The state’s healthcare spending is already financed with income tax and other revenue. And a majority of the state’s spending on Medicaid — the vast bulk of its healthcare spending — currently comes from the federal government.

Moreover, Virginia’s governor has already proposed a number of other tax increases that are certain to become law, such as a cigarette tax increases, a gas tax increase, and a repeal of state income tax deductions. There seems little impediment to these other taxes becoming law, because the governor, like legislative leaders, is a Democrat.

Virginia also faces considerable spending pressure. The governor’s proposed budget represents a whopping 20% spending increase between Fiscal 2019 and Fiscal 2022. And legislative leaders are further to the governor’s left, and want to increase spending even faster.

The estate tax might enable legislative leaders to increase spending at an even faster rate than the 20% sought by the governor. But it is unlikely to provide a stable, permanent funding stream for any new healthcare entitlements the legislature may create. That is because healthcare spending rises faster than inflation, while death tax revenue can rise much slower than inflation as some old people relocate to other states to avoid having their estates taxed. (For example, Trump recently changed his legal residence to Florida, which has no estate or income tax).

So healthcare entitlements tend to gradually outstrip any single tax earmarked to pay for them. Inevitably, they end up being financed more and more out of a state’s general fund, not just one specific tax.

The legislation to reinstate and increase Virginia’s estate tax has a real chance of becoming law. It is sponsored in the House of Delegates by Vivian Watts, a veteran legislator who managed to pass over a third of her bills last year, including a key tax bill, even though the legislature was controlled by her Republican opponents. It is sponsored in the state senate by Scott Surovell, who managed to pass 30.6% of his bills in 2019, even though he and other Democrats were in the minority back then.

This legislation had no chance of passing when Republicans controlled the legislature. But they are now in the minority. They will presumably continue to oppose this legislation. In the past, they have cited arguments by the Tax Foundation and others that death taxes are bad. The Tax Foundation says death taxes “reduce investment,”  “drive wealthy taxpayers out of state” (which cuts state income tax revenue), and forces people to waste lots of time and money on “estate planning and tax avoidance strategies” that “create dead-weight losses.”

Back in 2007, some moderate Democrats also supported the repeal of the death tax. But many of those moderates are no longer in office.

Hans Bader is an attorney living in Northern Virginia. This post was published originally in Liberty Unyielding.

Correction:  The death tax bills likely will not impact middle class. See update: “Virginia Death Tax Would Be Fairly Narrow.”

For more discussion of the Virginia death-tax proposal, see:A Sure-Fire Formula for Chasing Away Affluent Retirees.