Can Minnesota boost tax revenues by eliminating the death tax?

Yesterday, the House Taxes Committee discussed HF170, which would reduce the rates imposed under the estate tax by 1.6 percentage points per year, over a 10-year period, until each rate is zero. In other words, a 10-year phaseout of the estate tax. The House news service reports that:

After a vigorous debate that pitted the interests of family farms against those of the wealthiest Minnesotans, the bill was laid over for possible inclusion in an omnibus tax bill.

Data from the Department of Revenue shows that, since its enactment in 1979, Minnesota’s estate tax has never accounted for more than 1.3% of total state tax collections and the average over the 43 years from 1980 to 2022 is 0.6%, as Figure 1 shows. Indeed, the share of total state tax revenues accounted for by the estate tax has been steadily drifting down since that peak in 2006.

Figure 1: Estate Tax share of Total State Tax Collections

Interestingly, the Economic Growth and Tax Relief Reconciliation Act of 2001 phased out the federal state estate tax credit between 2002 and 2005 meaning that states, like Minnesota, that retained their death taxes imposed a much more substantial tax burden on estates starting in 2006, the year of that peak. Is this purely coincidence?

Research shows estate tax revenues down, other revenues up

The central fiscal fact of Minnesotan life at present is the forecast budget deficit of $3.5 billion in the 2028-2029 biennium, or $5.1 billion if you account for inflation. In these circumstances, wouldn’t it be crazy to cut off even this small source of revenue? The House news service reports that:

The Revenue Department estimates the gradual change would mean that $11.9 million less in tax dollars would enter the state’s General Fund in fiscal year 2026 before increasing to $116.1 million in fiscal year 2029.

But this analysis only accounts for the lost revenue from eliminating the estate tax. Research indicates that, in some cases, while estate tax revenues would certainly fall, other tax revenues might rise so that the overall fiscal impact would be a boost to state government finances.

In 2018, I wrote a report titled “The Cost of Minnesota’s Estate Tax” in which I assessed the fiscal consequences of eliminating the tax. It was rooted in the uncontroversial notion that taxes are incentives and that people respond to incentives. Minnesota’s relatively high rates of estate taxation push residents out of the state, and they take with them their future payments of income and sales taxes, for example. If we want to assess the full fiscal consequences of the estate tax, we have to account for the revenue it loses from the lowered collections of other types of tax arising from this incentive effect. I calculated that the revenue Minnesota lost from having an estate tax was greater than the revenue it gained: Over the period 2012-2013 to 2015-2016, the estate tax cost Minnesota’s government $69.1 million in lost revenue, $47.3 million in 2015-2016 alone.

More recent research confirms this finding. A 2023 paper by economists Enrico Moretti and Daniel J. Wilson titled “Taxing Billionaires: Estate Taxes and the Geographical Location of the Ultra-Wealthy,” looked at “the effect of taxes on the locational choices of wealthy individuals by examining the geographical sensitivity of the Forbes 400 richest Americans to state estate taxes.”

First, Moretti and Wilson find that:

…their residential choices are highly sensitive to these taxes, as 35 percent of local billionaires leave states with an estate tax. This tax-induced mobility causes a large reduction in the aggregate tax base.

Second, they find that:

…the revenue benefit of an estate tax exceeds the cost for the vast majority of states.

But Minnesota is not among this majority. Moretti and Wilson find that:

…the benefits of having [an estate tax] exceed the costs in all but 3 high-[Personal Income Tax] states: Hawaii, Minnesota, and Oregon.

There is a trade-off: You can have a high rate of estate tax or a high top rate of income tax – as Minnesota does – but you can’t have both. 

Moretti and Wilson calculate that based on “baseline elasticity,” the net expected present value (EPV) of Minnesota having an estate tax is minus $774 million (this is not an annual figure but the expected present value computed over the expected remaining lifetimes of the 2017 Forbes 400). They calculate that, for Minnesota, the costs of having the estate tax are 7% larger than the benefits.

People on the “right” are often too quick to assume that tax cuts will pay for themselves. They forget that the Laffer Curve goes up as well as down and sometimes you are on the side where lower rates do just mean lower revenues.

That doesn’t appear to be the case with Minnesota and its estate tax. Thanks to the state’s high top rates of personal income tax, it seems that ditching the estate tax will lead to higher state government revenues. That would help close that budget deficit, even if only in a small way.

This sounds suspiciously like the “free lunch” the famous economist told you didn’t exist. It isn’t quite. There is a cost to eliminating the estate tax, but it will be borne solely by those who see the tax, not as a way of raising revenue, but of hurting “the rich,” and only then in the form of bruised feelings. This is a price worth paying and we hope that policymakers “follow the science” and abolish the death tax.