Eliminating the Estate Tax Won’t Fix New Jersey, but it’s a Good Start
April 5, 2016
In January, a bipartisan group of New Jersey State Senators sponsored a bill to gradually eliminate the state’s estate tax after Governor Chris Christie raised concerns that it was making the state’s tax system “unfair and uncompetitive.” New Jersey faces many problems when it comes to tax climate. It has the highest property tax rates, and among the highest individual and corporate tax rates in the nation. Repealing the estate tax would not solve all of New Jersey’s problems, but it would lower the tax burden on many citizens and small businesses.
New Jersey is one of nineteen states to levy either an estate tax or an inheritance tax and is one of only two states to levy both. The inheritance tax is assessed on the amount of inheritance that the individual beneficiary receives, and then the estate tax is levied on the value of the deceased individual’s property. The inheritance tax allows individuals to transfer their estates to spouses, descendants, parents, and grandparents tax-free, but the estate tax only exempts transfers to spouses.
The estate tax exemption in New Jersey, at $675,000, is the lowest in the nation. This is well below the federal government’s $5.45 million exemption. If passed, the proposal would increase the estate tax’s exemption to $1 million in 2017, $2.5 million in 2018, $3.5 million in 2019, and $5 million in 2020, after which it would be eliminated.
Estate and inheritance taxes cover a person’s real estate, personal property, bank accounts, investments, small business interests, and life insurance, among other things. In addition, gifts made less than three years before death, even if they are below the gift tax exemption, are deemed to be “gifts made in contemplation of death” and are subject to the inheritance tax. The estate tax in New Jersey has 17 brackets with a top rate of 16 percent, and the inheritance tax has different tax treatment and brackets for four different classes of beneficiaries.
Designed to break up dynastic wealth, the estate tax in New Jersey is now affecting less wealthy individuals. New Jersey does not index its exemption to inflation, unlike the federal government. The exemption has not increased since 2001. As a result, individuals with lower levels of real wealth are being affected. If you simply own a house and have a modest retirement account, it is not difficult to exceed the exemption. Furthermore, a small business owner, due to the business’ assets, could easily exceed the exemption even with little in liquid assets.
The New Jersey Office of Legislative Services estimates that about 5 percent of deaths result in an estate tax liability; in the 2013 fiscal year, this amounted to 3,266 estates. This percentage rises to 11 percent when the inheritance tax is factored in. However, these figures fail to capture the percent of estates subject to the tax, since spousal transfers are exempt. Regardless, this rate is much higher than the federal estate tax where approximately 1 in every 700 deaths results in any estate tax liability.
The estate tax in New Jersey tends to fall more heavily on the moderately wealthy. Those at the very top of the wealth distribution have the incentive and the ability to hire accountants or attorneys to structure their assets to avoid the tax. Less wealthy individuals are less likely to know about the estate tax, or be able to hire estate planners. Data from the state illustrates this point. The New Jersey Office of Legislative Service found that in fiscal year 2013, 87 percent of estates with estate tax liability had less than $2.5 million in assets. Almost 40 percent had less than $1 million in assets. The federal estate tax would not hit any of these estates.
The burden of the estate tax goes beyond merely the tax liability. The estate tax creates costs for individuals who will not end up paying any tax. The complexities of dealing with deductions and trying to minimize the overall tax burden can end up costing thousands of dollars in attorney fees.
The low exemption rate for the New Jersey estate tax draws less wealthy taxpayers into the estate tax base. The tax has a detrimental effect on primarily upper middle class taxpayers and small business owners who have enough assets to be subject to the tax but are not wealthy enough to hire expensive estate planners to limit tax liability. Abandoning the estate tax will not solve all of New Jersey’s problems, but it will be a step in the right direction.