“First Take – The Estate Tax Doesn’t Work. Don’t make it worse.”
D.C. Policy Center 05/19/17 David Brunori
Next January, the District’s estate tax exemption will increase from the current $2 million to match the federal exemption of $5.49 million. Short of repealing what is a bad tax, increasing the exemption is the next best thing. Yet, some council members are reportedly inclined to delay or even repeal the increased exemption. However well-intentioned, keeping the District’s current estate tax is a bad idea.
The increased estate tax exemption (and the lowering of the franchise tax rate) are the last phases of a heralded tax reform plan adopted by the D.C. Council in 2014. The tax reform effort responsibly phased in changes over four years. And those changes have worked. No longer does the District carry a high tax reputation. That is good for everyone in the city. It is one of the reasons—if not the principle reason—why the city is attracting more business, more investment, and more residents than ever before. The D.C. Council should be wary of changing a course of action that has proven effective.
More fundamentally, however, the estate tax does not work well at the state level. It is not a coincidence that only eleven states and the District still impose the tax. Those repealing the tax include many blue states; California does not even impose an estate tax. There was a time when every state taxed death. But over time, even the most philosophically inclined realized estate taxation was not a very effective way of raising revenue.
The first problem with the tax is that most people don’t pay it. Most of us are just not lucky enough to die with enough money for the government to collect. A small portion of people pay the federal or any state estate taxes. Don’t get me wrong. Having to pay estate taxes would be a good problem to have when I am dead. But most of us won’t have to worry about it.
But there is a bigger problem than just not having enough rich folks. The people who have enough money also have the wherewithal to minimize or outright avoid death taxes. There is a host of ways to minimize federal estate taxes—which is why the taxes raise relative little money. Many of those minimizing tactics—virtually all perfectly legal—work at the state level. But rich folks in states with estate taxes have another more effective method. They move. Rich people move to avoid state estate taxes every day. And now with so many states refusing to impose the tax they do not have to move far.
I had the honor to serve on the D.C. Tax Revision Commission which recommended that the exemption be raised. That recommendation was adopted by the D.C. Council. I remember clearly the debate over the estate tax. Some members who argued from personal experience that the estate tax was an invitation to move out of the District. There are many anecdotes of lifelong District residents moving to Virginia when the end looks near. These rich folks are not venal or maleficent. They simply would rather have their children or other people of their choosing have their money rather than the District government. For about 100 years, public finance experts have said that redistribution of wealth is best left to central governments. The state estate tax is a prime example as to why.
In any event, the idea of an estate tax carries little justification. Proponents of the tax claim the city needs the money. But the tax raises little money. In 2016, the District raised about $53 million in estate and gift taxes. But it raised $7.4 billion in total taxes. Even under the best of times, there is no money there. Some proponents are also under the belief that a state estate tax would address income inequality. They view the tax as a way to prevent the perpetuation of rich people. But we know that is not true. The really rich in the District will either plan away the tax or move to Boca or maybe just Alexandria.
There are more philosophical reasons for opposing the tax. It does not take an Ayn Rand acolyte to think the estate tax is pure wealth confiscation. Society decides to take your money because, well, you have too much. There is not much principle involved in that determination. And I think that is why most Americans — including those who will never pay a dime in death taxes — oppose the estate tax. The last Gallup Poll on the subject found that 54 percent of Americans wanted to repeal all estate taxes.
Most District residents who have money earned it through hard work. A few got lucky and had their number come in and a few married right. But regardless of how they got their money, we would be mindful to remember that it is their money. The District would be wise not to stop or delay the expansion of the exemption. Some of those rich folks will not stick around until the bitter end.