Minnesota’s Economic News – W/E 4/16/21
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This morning, I was at the capitol to testify against a bill, HF 2557, which would raise the top rate of estate tax in Minnesota. Here is my testimony.
My name is John Phelan and I am an economist with the Center of the American Experiment, a think tank based in Golden Valley. I am here to speak in opposition to this bill.
Minnesota taxes estates more heavily than most states. It is one of only fourteen states plus the District of Columbia to levy an estate tax. Eight of those fourteen states and the District of Columbia have a higher exemption. The state’s starting rate of estate taxation—12 percent—is higher than any of the other jurisdictions that levy one. Its top rate is 16 percent. Only the state of Washington has a higher top rate.
“Incentives do make a difference”. So said our former governor, Mark Dayton, when discussing what state governments could do to attract investment. You raise taxes on cigarettes because you think it will incentiveize people to stop smoking. Look at wine taxes, as we’ve just discussed. You have to apply that logic consistently, even in the case of the estate tax.
Some individuals will take steps to avoid paying the estate tax. There are many legal avenues open to those who wish to do this. They can divest assets prior to death by sale or donation. They can also leave the state for a jurisdiction with a lower rate or no estate tax at all. This is very easy in the U.S. There is a wealth of evidence that all of these methods are utilized to lower estate tax burdens.
In 2013, the Minnesota Society of Certified Public Accountants surveyed their members and found that “more than 86 percent of respondents said clients had asked for advice regarding residency options and moving from Minnesota.” Ninety-one percent said the number of clients asking about moving increased from previous years.
Minnesota’s estate taxes brought in $183 million in revenue in 2016, 0.8 percent of the state’s total income. But this revenue effect has to be measured against the incentive effect of tax revenues lost as people leave Minnesota to avoid the estate tax.
Using survey evidence and official data, we are able to estimate the income tax and sales and excise tax revenue the state of Minnesota loses when people leave to avoid the estate tax. If two thirds of 55 to 65 year olds and 80 percent of those over 65 who left because of state taxes left because of the estate tax, then the tax was a net revenue loser for the state government in every year from 2012- 2013 to 2015-2016. Over that period, the estate tax cost Minnesota’s government $69.1 million in lost revenue, $47.3 million in 2015-2016 alone.
The 2017 tax bill raised the federal estate tax exemption from $5.6 million to $11.2 million. This has intensified the competition between states, New Jersey and Delaware repealed theirs in 2018. It has put pressure on those, like Minnesota, with estate taxes at high rates, either to abolish them or, at least, raise their exemption to the new federal level. This bill goes in totally the wrong direction.
It is sometimes said that taxes such as this are “fair” because they negatively impact a relatively small number of people. But, if we see taxes as a way to fund government activities and not simply as a way to hurt a few people in the name of social engineering, this is not the case. This bill proposes to do nothing at all for the poor. It will raise nobody’s wages. It only affects ‘the rich’.
I would like to close by citing these wise words
The whole business thing is predicated a lot on the tax laws…It’s why we rehearse in Canada and not in the U.S. A lot of our astute moves have been basically keeping up with tax laws, where to go, where not to put it. Whether to sit on it or not. We left England because we’d be paying 98 cents on the dollar. We left, and they lost out. No taxes at all.
This sage was Keith Richards of The Rolling Stones.
John Phelan is an economist at the Center of the American Experiment.