The Cost of Minnesota’s Estate Tax

Executive Summary

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. Th e 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.

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 raises the federal estate tax exemption from $5.6 million to $11.2 million. This is likely to intensify the competition between states and 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.