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November 24, 2009

Estate tax, not income tax, drives rich from Maryland

Of course the number of Marylanders earning more than $1 million plunged last year. There was a financial crisis. Proportionally, as they affect income and net worth, financial crises hurt the wealthy more than others. The plunge in the fortunes of the very wealthy after the Depression caused the mid-20th century decline in income inequality as much as anything else.

But that doesn't mean taxes aren't persuading rich folks to bug out of Maryland. The number of million-dollar-plus tax returns in the state fell by 30 percent last year, reports Laura Smitherman. More to the point of tax flight, more than 500 filers with million-dollar incomes in 2007 filed no tax return for 2008, meaning they moved, died or just didn't file. Surely many of them moved.

But probably not because of the special, 6.25 percent "millionaire's" bracket on the income tax. That expires next year. Rich people are exiting Maryland, their lawyers will tell you, because of Maryland's estate tax. Maryland's estate tax applies to estates of over $1 million and can take hundreds of thousands or millions from a dead person's heirs. The federal estate tax kicks in only on estates of more than $3.5 million. And many states, including Virginia and Florida, have no estate tax at all.

For the wealthy, Maryland's estate tax is a much more powerful repellent than its income tax. I guess Republicans focus on criticizing the income tax surcharge because it was approved by Gov. O'Malley. The estate tax has been around for a while. But I bet the income tax isn't the main factor.

Posted by Jay Hancock at 8:31 AM | | Comments (5)
Categories: Taxes
        

Comments

Jay,
Estate taxes are a problem in most states, it seems. My problem is with the federal estate tax. $3.5 million might seem like a lot to the average person, but when you've been building a business for over 30 years you're bound to accumulate assets. That doesn't mean you're rich. It just means that you have a lot of equipment or land in your name and a couple dozen employees working for you. What nobody ever seems to make clear is that estate taxes are levied on all assets, not just income and savings. I'm a huge supporter of overturning estate taxes at all levels of government. I'm a member of Estate Tax Truth, a project of the American Family Business Foundation. According to them, repealing the federal estate tax would help small businesses like mine create more than 1.5 million jobs. Estate taxes don't just drive out rich families, they drive out jobs. In this economy, that's something we should all worry about.

Hancock's article is good reading - not just for Maryland policymakers - but for Congress, too.

Estate taxes, and any tax on capital, discourage small business owners, entrepreneurs and investors from creating job and spurring America's economic recovery.

A study at www.estatetaxtruth.org finds that the estate tax reduces overall employment in America by 1.5 million jobs. This comes as little suprise when you watch the video, also at www.estatetaxtruth.org, about Helen Wisotsky, whose family business was sold to pay the estate tax.

This unjust tax has got to go. Is the MD house of Delegates listening? Is Congress listening?

This issue has been studied extensively and de-coupled state estate taxes do not encourage emigration. See "Do the Rich Flee from High State Taxes? Evidence from Federal Estate Tax Returns" by Bakija and Slemod here:

http://deepblue.lib.umich.edu/bitstream/2027.42/39176/1/916.pdf

There is no evidence that "[e]state taxes, and any tax on capital, discourage small business owners, entrepreneurs and investors from creating job and spurring America's economic recovery." As the Congressional Research Service has noted: "the effects of cutting the estate and gift tax on savings would not be large and would not even necessarily be positive.”

Jane G. Gravelle and Donald J. Marples, “Estate and Gift Taxes, Economic Issues,” Congressional Research Service, March 19, 2008, http://wikileaks.org/leak/crs/RL30600.pdf.

See also the report by the Center for Budget and Policy Priorities that directly addresses the argument made above:

http://www.cbpp.org/cms/index.cfm?fa=view&id=2861#_ftn13

Finally, the American Family Business Institute (not "Foundation") regularly spreads what FactCheck.org has termed "malarkey" about the estate tax. See here:

http://www.factcheck.org/article328.html

Stuart, you have been drinking too much Kool Aid. Can you seriously claim that a 45% federal estate tax plus a nearly 10% state estate tax has no affect on jobs? I bet you also believe Barack when he says the country will save money by extending health care to 45 million Americans? OOPs! That's 30 million Americans and 15 million undocumented residents. Linda Douglas is probably behind the studies you site

I checked out that fact check page Stuart, and I'm not sure why you are so proud of it. It does not deny that the estate tax kills small businesses, nor does it deny that the estate tax places $12 Billion per year into the pockets of AIG and other big life insurance companies. So, my question is, why do you use verbose smokescreens to defend job killing corporate welfare? Does AIG sign your paycheck?

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About Jay Hancock
Jay Hancock has been a financial columnist for The Baltimore Sun since 2001. He has also been The Baltimore Sun's diplomatic correspondent in Washington and its chief economics writer. Before moving to Baltimore in 1994 he worked for The Virginian-Pilot of Norfolk and The Daily Press of Newport News.

His columns appear Tuesdays and Sundays.
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