Virginia Repeals Estate Tax and Increases Competitiveness

September 6, 2006

There are many reasons to oppose federal and state estate taxes. One that is sometimes overlooked is the damage an estate or inheritance tax does to a state’s competitiveness. Now that 25 states no longer levy estate taxes, states that continue to impose estate or inheritance taxes may have a hard time attracting or keeping retirees and business owners who wish to pass the business on to their children.

A recent Wall Street Journal article (subscription required) addresses this issue, whish was on the mind of Virginia Governor Tim Kaine and the state legislature when they agreed last week to abolish the state estate tax, effective in July 2007:

The tax only brings in about $140 million a year to Richmond from several hundred estates, but the levy has made it harder for Virginia to compete for small businesses and retirees with Florida and the 24 other states that no longer have a death tax. So when Governor Kaine proposed killing the tax earlier this year, the legislature overwhelmingly approved.

Only a few years ago nearly every state taxed estates at death, in part because a federal tax credit allowed states to keep part of the revenue that would otherwise go to Uncle Sam. Last year the federal tax credit was abolished and in two dozen states the death tax died along with it. But not at first in Virginia, which had decided way back in 1978 that it would go on collecting its death tax even without the benefit of a federal tax credit. Not any more.

Estate taxes have a disincentive effect on entrepreneurship, force the sale of family businesses and farms, and impose high tax compliance costs—all for a relatively small amount of revenue. Virginia’s desire for a competitive tax system has also led it to a more principled tax system.

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A 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.

An 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.

A tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly.