Wall Street Journal Encourages Readers Not to Die in New Jersey

February 8, 2011

Today’s Wall Street Journal (subscription required–subscribe at Amazon) advises readers not to “die in New Jersey any time soon.” It’s the sort of morbid advice you don’t normally see in a newspaper, but, for anyone concerned with passing on an estate to their heirs, there’s some validity to it. From the article:

Here’s some free financial advice: Don’t die in New Jersey any time soon. If you have more than $675,000 to your name and you die in the Garden State, about 54% may go to the IRS and the tax collectors in Trenton.

Better not take your last breath in Maryland either. The tax penalty for dying there is half of a lifetime’s savings. That’s the combined tab from the new federal estate tax rate of 35% and Maryland’s inheritance and death taxes. Maybe they should rename it the Not-So-Free State.

This perverse confiscation also applies to some 20 other states, thanks to a quirk in December’s GOP-White House tax compromise. The new law applies a top federal death tax rate of 35% with a $5 million exemption for 2011 and 2012. But it also changed a federal credit for state death tax rates into a federal deduction. The credit allowed a dollar-for-dollar reduction in federal taxes for state levies as high as 16%.

The article also discusses the death tax’s effect on out-migration:

New research indicates that high state death taxes may be financially self-defeating. A 2011 study by the Ocean State Policy Research Institute, a think tank in Rhode Island, examined Census Bureau migration data and discovered that “from 1995 to 2007 Rhode Island collected $341.3 million from the estate tax while it lost $540 million in other taxes due to out-migration.”

In addition to the possible out-migration effect (for more on state-to-state migration, use the Tax Foundation’s migration data tool), there are a number of reasons to oppose federal or state death taxes: they have a disincentive effect on entrepreneurship, they force the sale of family businesses, they impose high tax compliance costs, they reduce income tax revenue, and they can even encourage people to die sooner.

Read a Tax Foundation primer on the federal estate tax (May 2010) or view estate tax collection data by state.

More blog posts on estate taxes.

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