Everyone knows Ben Franklin’s quote about “the certainties” of death and taxes. We’re all going to die, and we all are supposed to pay taxes. And sometimes, dying itself creates a tax burden. We call it an “estate tax.”
By a 7-6 vote last week, a majority of the Maine Legislature’s Taxation Committee voted to repeal this tax at the state level. It has the support of Gov. Paul LePage and several others, trying to keep Mainers from fleeing our state. But what would Ben Franklin and the other founders think?
Since taxes have changed so much for the earliest days, it is hard to say. The Continental Congress, made up of some of the wealthiest men in the colonies, believed they should contribute more toward the revolution, as they had the most to preserve. At the same time, Franklin’s hypothetical “hard government” would levy a flat 10 percent tax.
Whatever their thoughts, the founders did not make death a taxable event. Those taxes came into being in the late 19th century in the states, while making a permanent federal appearance in the early 20th century. With something so longstanding, why are Maine and other states considering repeal of the “death tax”?
One reason is the federal government; like Lucy, they moved the football. Since at least the 1950s, federal estate tax liability was reduced dollar-for-dollar for every dollar paid in state-level estate taxes. Thus states would not increase the deceased’s overall tax liability by having their own estate tax — they would simply deny Washington part of the cut. If you died a resident of Maine or Florida, your bill would be pretty much the same.
Beginning in 2005, the federal law was repealed. The credit was replaced with a deduction. Like your income tax deductions, it reduces your taxes owed but does not replace them dollar-for-dollar. Now, there can be a significant difference in your tax bill depending on where you live when you die.
“So what?” some will ask, since this tax normally applies to estates exceeding $5 million in value. Understandable. However, there are two reasons why this presents a problem for our state.
First, talk to lawyers, accountants, financial advisers, and others who advise those with significant assets. They tell their clients — mostly empty-nesters and retirees — to establish residency in states without income and estate taxes. When they move out of Maine for a majority of the year, they take a significant portion of their charitable giving, sales tax paying, consumer spending, and angel investing with them.
But secondly, the estate tax incentivizes people to liquidate their hard assets. If you own a Maine business, it makes sense to sell out and take your payment in cash or stock. You can easily move paper across state lines to tax-friendly jurisdictions, even if the new owner shuts your business down and leaves your employees out of work. Meanwhile, if you are a capital-intensive family business trying to continue operating — think the big farms in The County or earthwork contractors with lots of heavy equipment — you get whacked. You can’t really move your land, cold storage, trucks, and tractors to other states.
That is the perverse reality. If you decide to sell your business to the high bidder, you will ultimately get favorable tax treatment by fleeing Maine. If you continue to invest in our communities and run a business creating jobs, the state’s tax man cometh upon your demise.
This is not an argument for a complete abolition of the policy underlying the estate tax. One of the benefits of the tax is a “step-up” in basis. If a family inherits $10 million in assets, the deceased would have paid around $2 million in estate taxes to the federal government. However, if the kids turn around and immediately sell those assets, they will receive $10 million with no income tax liability.
The entire construct should be flipped. Abolish the estate tax at all levels and provide a “step-down” in basis when assets are transferred at death. If the family wants to sell out, then they can pay lots of income taxes. If they decide to keep their businesses running — growing potatoes, moving dirt, creating jobs — then don’t send a tax bill to the funeral.
Yet in order for that reform to occur, we need Washington to act. So, until then, our Legislature should follow the majority of its Taxation Committee and get the “death tax” off the books. We don’t need to incentivize Mainers to sell their businesses for tax reasons. “Death and taxes” may both be certainties, but we certainly don’t need them together.