Feds Fiddle with Tax Plan While States Repeal Estate Tax

While the federal government wrestles with what to do with the estate tax, many states are quietly forging their own path.

On the federal level, the estate tax affects a relatively small set of Americans, “applying only when someone leaves assets worth more than $5.49 million to heirs. Together, parents can leave $11 million to their children without paying a penny in estate taxes,” noted the New York Times. Only two out of every 1,000 estates will owe federal estate tax in 2017, said the Center on Budget and Policy Priorities in a report.

On the state front, for example, residents of New Jersey who die after January 1, 2018 will not have an estate tax, although Forbes noted that the state’s inheritance tax is still in effect. The killed revenue will be offset by a 23-cent-per-gallon gas tax and tax assistance to elderly residents.

In 16 Years, Estate Tax Whittled to 17 Survivors

Back in 2001, noted the Huffington Post, every state in the nation had either an estate tax or an inheritance tax. “But that year, the federal government eliminated its income tax credit for such payments—and the repeals began. By 2018, only 17 states will have an estate tax, an inheritance tax or both.”

Action in New Jersey follows what happened in Virginia in 2007, in Indiana, North Carolina and Ohio in 2013, and in Tennessee in 2016. Earlier this year, Minnesota weakened its estate tax by pushing the exemption from $1.8 million to $2.1 million and making it retroactive to January 1, 2017. There, the move was reluctantly supported by the governor who bemoaned the tax break to wealthy Minnesotans but agreed to the change since the compromise bill included child care tax credits, property tax cuts for farmers, and increased government aid to cities.

Same Goes for Delaware While Maryland Adjusts Its Rate

The estate tax was also eliminated in Delaware this year even though the state had $400 million to make up. And like in New Jersey, loss of the estate tax was negotiated during budget talks which eventually agreed on tax increases for real estate transfers and corporations.

“Delaware state Rep. Paul Baumbach, a Democrat, said getting rid of the estate tax—which brought in an average of $3 million to $5 million a year—in return for a $100 million projected increase in other revenue, was ‘an easy decision to make,’” the Huffington Post reported. “He said he is attuned to the voices of liberals in his state who opposed it, but ‘when they realized it was a 20-to-1 tradeoff, they understood where it came from.’”

In Maryland, the exemption will go from $3 million to $4 million in 2018 and then to whatever the federal rate is in 2019. The deal struck there included a raise in the minimum wage to $9.25 an hour.

States Compete to Be ‘Tax Friendly’

The move in Delaware helped propel that state into Kiplinger’s list of top tax-friendly states. Other tax-friendly states without an estate tax include Wyoming, both Dakotas, Florida, Nevada, Arizona, Louisiana and Mississippi. The least tax-friendly with estate taxes of any kind, according to Kiplinger, include Minnesota, Maine, Vermont, New York, Connecticut and Illinois.

“Estate and inheritance taxes have large compliance costs, tend to suppress entrepreneurship, and are among the most harmful taxes,” said the nonprofit Tax Foundation. A writer for Forbes went further, calling the tax simply “immoral.”

“The fact that declaring any inheritance above some limit to be immoral involves such an arbitrary line is a hint that drawing such a line is the faulty part of the process,” said writer Jeffrey Dorfman. “Who among us is entitled to choose how much is okay to inherit?”

So while the federal government continues to struggle with those and other questions, the states are making their own answers for now.

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