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Periodic Windfalls Bolster Case for State Estate Tax Regimes

Posted on Oct. 22, 2019

States with an estate tax run the risk of scaring off their ultra-wealthy residents and losing out on both income and estate taxes, but new research suggests the revenue gamble might be worth it.

Billionaire taxpayers are “keenly sensitive” to the differences between state estate tax regimes and are increasingly likely to move to a state without an estate tax, particularly as they grow older, according to a research paper released October 21.

“States face a trade-off,” wrote the authors, economist Enrico Moretti of the University of California, Berkeley, and Daniel J. Wilson of the Federal Reserve Bank of San Francisco. Those with an estate tax regime not only lose out on estate tax revenue when a wealthy resident moves to a new jurisdiction, they also lose a source of ongoing revenue, mainly income taxes.

However, the authors found that the one-time tax windfall that results when a resident billionaire dies in a state with an estate tax can often dwarf the loss of revenue from other sources.

For example, Moretti and Wilson calculated that if Amazon CEO Jeff Bezos, with an estimated net worth of $114 billion, were to die in 2019, his estate would end up paying nearly $12 billion in estate taxes to the state of Washington, which would boost the state’s total tax revenue from every source by more than half in a single year.

“The median person in the 2017 Forbes 400 has estimated net worth of ‘only’ $3.7 billion, and the typical impact of a Forbes 400 death on state revenues is of course smaller,” the authors noted.

Just 12 states and the District of Columbia have an estate tax regime.

Running the Numbers

The Economic Growth and Tax Reconciliation Relief Act of 2001 repealed the federal credit for state-level estate taxes, which up to that time had equalized the combined federal and state tax treatment of taxpayers in a non-estate-tax state with those in a state with an estate tax.

The act therefore “introduced large differences in billionaires’ estate tax burdens among states where there had been none,” Moretti and Wilson wrote. In subsequent years, wealthy individuals appear to have responded by opting to move to states without an estate tax; conversely, ultra-wealthy taxpayers also became less likely to move into a state with an estate tax.

The authors further found that age seems to have played a factor in tax avoidance by billionaires, with the number of older billionaires on the Forbes list in states with an estate tax dropping relative to the number of younger billionaires, which remained mostly unchanged since 2001.

Moretti and Wilson compared data from the Forbes list of the top 400 richest Americans with a state’s estate tax revenue data and found that there was often a sharp increase in estate tax revenue in the three years following a billionaire’s death. They concluded that a Forbes billionaire’s death boosted a state’s revenue by an average of $165 million per death.

Additional revenue from an estate tax exceeds the loss of income tax revenues by 31 percent for the average state, although that result varies significantly depending on a particular state’s income tax laws. For states with high income tax rates, the cost of forgone income tax revenue is much higher, while states without an income tax stand to gain the most revenue, the authors noted.

“Overall, we estimate that 28 of 29 states that currently do not have an estate tax and have at least one billionaire would experience revenue gains if they adopted an estate tax on billionaires, with California the lone exception,” Moretti and Wilson concluded.

Follow Jonathan Curry (@jtcurry005) on Twitter for real-time updates.

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