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POLICY INSIGHT
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States Should Retain Their Estate Taxes

Lawmakers in several states including New Jersey and Rhode Island are debating whether to reduce or even eliminate their states’ estate taxes.  They should resist these calls and retain these taxes, which help reduce inequality and build broadly shared prosperity, as I explain in a new paper.

Only the very wealthiest taxpayers pay estate taxes — just an average 2.56 percent of estates, in the states with the tax.  Those taxes raise revenue for public services that build a stronger economy, protect against extreme income inequality, and ensure that the wealthy pay taxes on certain forms of wealth.

A phase-out of the federal estate tax that President Bush and Congress enacted in 2001 effectively repealed state estate taxes by 2005 unless states acted to retain them.  Many states kept their estate taxes intact by passing legislation to “decouple” from the federal law or by creating separate taxes, but other states didn’t, allowing their estate taxes to disappear.

That was a mistake.  Estate taxes serve many important public purposes, including:

  • Providing revenue for investments that promote a strong economy.  Eighteen states plus the District of Columbia raise $4.5 billion a year from estate and inheritance taxes (see map), which support schools, roads, and other important public services.  This revenue will likely fall in the coming years as some states phase in estate tax cuts that they’ve already enacted.  If all states without an estate tax reinstated one, they’d raise an estimated $3 billion to $6 billion more a year. 

    Estate taxes help — not harm — a state’s economy by supporting services that make a state an attractive place to do business and live.  Despite opponents’ claims, research confirms that very few wealthy people move as a result of an estate tax.

  • Reducing inequality.  Estate taxes are paid by the very wealthiest families — those most able to afford them.  And by boosting the share of their income that the wealthiest must pay, estate taxes can make state tax systems — which now require the lowest-income families to pay the most — more equitable.
  • Closing a loophole that benefits the wealthiest.  Without an estate tax, many unrealized capital gains go untaxed at the state level.  That happens when an asset that has risen in value isn’t sold during the owner’s lifetime, leaving profits to the heirs.

Click here to read the full paper