The estate tax plays a positive role in generating revenue and reducing the regressivity of Minnesota’s tax system, as noted in the first part of this series. However, no discussion of the estate tax would be complete without addressing conservative criticisms of the tax.
The most frequently cited attack on a state-level estate tax is that it will encourage flight of high-income households to other states. Claims of tax flight from conservative interest groups based on Internal Revenue Statistics of Income, however, are flawed for reasons described in a July 8 North Star article. While there is anecdotal evidence of tax flight from accountants and tax attorneys, the sample of the population that these professionals are in contact with is skewed heavily in favor of those who are seeking to avoid the estate tax. Furthermore, it is unclear just how many high income households who seek professional advice on estate tax avoidance will actually go through the expense and hassle of changing their domicile to another state.
A review of tax flight research conducted by non-partisan staff at the Minnesota Department of Revenue—summarized in the Department’s 2014 estate tax report—notes that:
Most rigorous and peer-reviewed studies of tax migration fail to find any statistically significant effects of tax variables. This is true when studies are limited to seniors, and it is true for both estate taxes and income taxes.
Estate tax opponents also argue that the estate tax can be avoided through elaborate legal schemes, which—at least to some degree—is true. However, the fact that Minnesota’s estate tax is projected to generate $361 million in revenue during the current biennium demonstrates that not all of the tax can be avoided. Furthermore, if the state were to repeal every tax that some taxpayers attempt to avoid, state coffers would be greatly depleted. As with any tax, the existence of elaborate estate tax avoidance schemes is an argument for closing these tax loopholes, not for elimination of the tax in its entirety.
Opponents of the estate tax further contend that the tax constitutes a disincentive to work because the state claims a portion of the accumulated estate upon death. This argument is flawed from at least two perspectives:
- As noted in part one of this series, the average effective estate tax rate (i.e., the state estate tax as a percent of gross estate value) of all 2012 resident estate tax filers was just 3.1 percent and did not exceed 4.5 percent for any income group. Furthermore, these statistics were compiled before the substantial estate tax relief enacted in 2014, which—when fully phased-in—will exempt taxable estate value below $5 million for farms and small businesses and $2 million for other estates. It is difficult to see how such relatively low tax rates could be a substantial disincentive to work.
- The taxation of accumulated wealth at the time of death does not inhibit the enjoyment of wealth accumulated prior to death.
Another commonly heard criticism of the estate tax is that it prevents the passing of a family farm or business to the next generation. Minnesota’s generous $5 million exemption for estates consisting mostly of farm and small business property takes much of the steam out of this critique. A 2011 issue brief from United for a Fair Economy notes that:
Very few family farms and small businesses are affected by the estate tax. The Congressional Budget Office estimates that with a $2 million exemption, only 123 farms per year in the U.S. would owe any estate tax, and the number of small businesses is similarly small. In 2001, the New York Times reported that American Farm Bureau Federation (who was in favor of repealing the estate tax) could not cite a single case of a family farm lost due to the estate tax. [Since 2001, federal estate taxes have been further reduced.]
Finally, Minnesota conservatives contend that the existence of the large state budget surplus—projected to be $1.4 billion for the upcoming FY 20118-19 biennium—affords an opportunity to repeal Minnesota’s estate tax. Much of that surplus, however, consists of one-time revenue that should not be used to finance permanent estate tax reductions. Furthermore, the projected surplus could disappear entirely if we take into account growth in state expenditures due to inflation, as is recommended by the Minnesota Council of Economic Advisors. (The anticipated impact of inflation on the projected state surplus was described in a December 7 North Star article.)
To the extent that there is sufficient revenue in the state general fund to provide tax relief, it should not be distributed in a way that increases the regressivity of Minnesota’s already regressive state and local tax system. Low- and middle- income Minnesota families are already paying more state and local taxes per dollar of income than the high-income households most likely to be affected by Minnesota’s estate tax. Eliminating or further reducing the estate tax would exacerbate this disparity by shifting an even larger share of the total Minnesota tax load on to these low- and middle-income households.
The benefits arising from the Minnesota estate tax—such as the reduction in the regressivity of Minnesota’s tax system—are clear and empirically demonstrable. Meanwhile, the claims of tax flight and work reduction resulting from the tax are overstated. Repeal or significant reduction in Minnesota’s estate tax would make Minnesota’s tax system even more regressive than it already is and would accelerate the pernicious trend of wealth concentration among the wealthiest households.