This week, Maryland Governor Martin O’Malley (D) will receive a bill that would raise the state’s estate tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the IRS, preventing them from having to pay income tax. from $1 million to the federal level by 2019. The bill, sponsored by Delegate Susan Krebs (R-Carroll), passed by both houses of the state legislature, would raise the exemption to $1.5 million in 2015, $2 million in 2016, $3 million in 2017, and $4 million in 2018 before matching the federal exemption (projected to be $5.9 million) on Jan. 1, 2019. The state exemption would be coupled with the federal exemption going forward, meaning it would be inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. adjusted each year.
While 19 states and the District of Columbia still impose estate or inheritance taxAn inheritance tax is levied upon an individual’s estate at death or upon the assets transferred from the decedent’s estate to their heirs. Unlike estate taxes, inheritance tax exemptions apply to the size of the gift rather than the size of the estate. es on their citizens (see tables 34 and 35 here), in the last four years, five states have repealed their estate or inheritance taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es and significant changes are expected in at least five more and the District.
The cost of compliance with estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. es is astronomical. According to a study by economists Henry J. Aaron and Alicia H. Munnell, the cost of complying with estate taxes about equals the total revenue that they raise. They go on to explain that “the ratio of excess burden to revenue of wealth transfer taxes is among the highest of all taxes."
Counter to popular criticism, there is also evidence that estate taxes increase income inequality. A study by Joseph Stiglitz—who served as chair of the Council of Economic Advisors in the Clinton administration—concluded that taxes on wealth transfers increase income inequality by driving up the return on capital. According to Alan Blinder, who also served on the Council of Economic Advisors under Clinton, only about two percent of income inequality can be attributed to inherited wealth.
Another problem that estate taxes is that they are inequitable in their application. As we noted in the Huffington Post, many wealthy citizens are able to skirt estate tax bills entirely with careful tax planning, while others that die unexpectedly get hit with the full force of the rates. People with illiquid holdings, especially farmers, are hit by the estate tax more heavily. Estate taxes also hurt family businesses, while corporations are not subject to estate taxes.
At least for today, it seems as though Maryland Republicans and Democrats have found something they can agree on, and for that, they deserve kudos.
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