The Cost of Minnesota’s Estate Tax

Preview:

Britain’s Prime Minister David Lloyd George is supposed to have said of the Inheritance Tax, “Death is the most convenient time to tax rich people.” A century on, these taxes, known as inheritance, estate, or death taxes, remain with us. The Economist wrote recently that “a permanent, hereditary elite makes a society unhealthy and unfair” and concluded that “the positive argument for steep inheritance taxes is that they promote fairness and equality.

Th is assumes that people will simply hand over their wealth to the government. But the majority of the consequences of any action are unintended ones. Estate taxes do other things besides bring in revenue. Specifically, they incentivize people to take action to avoid paying them. There are a number of ways in which people can do this, so many, in fact, that, according to the 2006 report of the Joint Economic Committee, “two liberal economists have noted, ‘tax liabilities depend on the skill of the estate planner, rather than on capacity to pay.’” As President Trump’s Chief Economic Adviser Gary Cohn put it more bluntly, “Only morons pay the estate tax.

One of these methods is simply to move. Those who reside in a state with an estate tax, especially one with a high rate, can migrate to a jurisdiction without one or with a lower rate. In the United States, where estate taxation varies from state to state, with many not taxing estates at all, this is a particularly important avenue of estate tax avoidance.

So, the effects of estate taxes run in two different directions, from a government revenue point of view. On the one hand, they increase overall revenues by the amount due from taxable estates. We can call this the revenue effect. On the other hand, estate taxes reduce overall revenues by the amount of the tax liable on the income and wealth that people take with them when they leave the jurisdiction to avoid the tax. We can call this the incentive effect. If the incentive effect is greater than the revenue effect, then the estate tax actually lowers government revenues.

But while the dollar value of the revenue effect is known, that of the incentive effect is harder to calculate. In Minnesota, the revenue effect totaled $183.2 million in 2016, the amount of revenue brought in by the tax. By contrast, no figures exist for the number of people who leave Minnesota because of its estate tax or what their tax liabilities might be if they stayed.

However, there is information from surveys and official statistics that allows us to estimate the dollar value of the incentive effect which we can then set against the revenue effect. This enables us, for the first time, to estimate the cost of Minnesota’s estate tax.

In this report, we first quantify the revenue effect side of our equation. Then we move on to investigate the incentive effect side. We start by looking at some of the theory behind incentives in economics. This establishes a basis for the existence of an incentive effect. We then look at the recent history of estate taxes nationwide and the details of that history here in Minnesota. Then, we look at some of the research which shows quite clearly the existence of an incentive effect resulting from estate taxes. Finally, we estimate what the costs of the incentive effect may be in terms of lost revenues to Minnesota’s state government.

A full copy of the report can be viewed here.