The Tax Foundation has released a report,State Inheritance and Estate Taxes: Rates, Economic Implications, and the Return of Interstate Competition, which is available for download. It’s key findings are as follows:
- Eighteen states and the District of Columbia impose either inheritance or estate taxes, with fourteen states (plus Washington, D.C.) levying estate taxes and six states levying inheritance taxes. Of these, two states (Maryland and New Jersey) impose both taxes, though New Jersey is in the process of repealing its estate tax.
- For decades, the federal government offered a credit against federal estate tax liability for state inheritance and estate taxes paid, which allowed states to impose a “pick-up” estate tax without increasing residents’ overall tax liability. The elimination of this credit in 2005 ushered in a new era of estate and inheritance tax competition among the states.
- Washington State has the highest top marginal estate tax rate at 20 percent, while the 18 percent rate Nebraska imposes on bequests to nonrelated individuals is the nation’s highest inheritance tax rate.
- State inheritance and estate taxes, together with the federal estate tax, reduce investment, discourage business expansion, and can sometimes drive wealthy taxpayers out of state.
- When high net worth individuals leave states with high inheritance and estate taxes, their state of origin loses not only the prospective estate or inheritance tax revenue, but also the revenue from other taxes that might have been collected during their lifetimes.
- Estate planning and tax avoidance strategies create dead-weight losses, reduce economic efficiency, and in some instances break up farms and family-owned businesses. These costs must be taken into account above and beyond actual collections under estate and inheritance tax regimes.
- Since 2005, states have been moving away from estate and inheritance taxes, a trend that is likely to continue.
Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.