Wealthy Marylanders would get a posthumous tax break under legislation passed Thursday by the General Assembly in the hope of keeping millionaires from fleeing to other states.
The state Senate gave final approval to a measure long sought by Republicans to slash the taxes that are levied on estates. The legislation would do that by gradually raising the portion of an estate that is exempt from taxation. By the end of the decade, the bill would cut the number of estates that pay the tax each year by more than 80 percent.
Already passed by the House, the bill now goes to Gov. Martin O'Malley for his expected signature.
In political terms, the estate tax bill has been seen as a gesture toward high-income Marylanders at a time when the General Assembly is also expected to pass legislation that would raise the state's minimum wage.
O'Malley's spokeswoman, Nina Smith, issued a statement Thursday underscoring that linkage.
"We will, of course, conduct the customary reviews before making any final determinations, but we expect the governor to sign this bill into law," she said. "Having passed this measure, the governor hopes that the General Assembly will now finish the work of giving Maryland a raise and increase our minimum wage to $10.10 an hour."
The estate tax legislation, which the Senate passed 36-10, is a priority of House Speaker Michael E. Busch and Senate President Thomas V. Mike Miller.
The measure would, over five years, raise the amount of an estate exempt from Maryland's tax from $1 million to nearly $6 million, the same level as in federal law. It would cost the state $105 million in annual tax revenue by 2019, when it would fully take effect.
Opponents pointed to that estimate, contending that the change would cost the state money that could be used for education and other purposes and would widen income inequality. Proponents countered with stories of people they knew who changed their primary residences to other states to avoid the tax, which has a top rate of 16 percent.
Responding to a challenge by Senate Republican Leader David R. Brinkley of Frederick County to "look south" at the states without estate taxes, Sen. Paul G. Pinsky of Prince George's County did just that. Pinsky, a Democrat, rattled off a list of Southern states with no estate taxes but bottom 10 rankings for investment in education.
"Do we want to join the race to the bottom?" Pinsky said. Saying there is no evidence that the estate tax is causing an exodus of the wealthy, Pinsky pointed to statistics showing that Maryland leads the nation in the percentage of residents who are millionaires.
In pushing the higher exemption, Busch and Miller adopted an issue that has long been a favorite cause of Maryland Republicans, many of whom would prefer to see repeal of the tax. All of the Senate's Republicans voted in favor of the bill Thursday.
Brinkley called the bill's passage "a step in the right direction." He said the legislation is especially important to owners of small businesses who want to keep the enterprise in the family, giving the example of the owner of a $5 million plumbing company whose family would face no estate tax in Florida but roughly $650,000 in Maryland.
"They shouldn't have to pay over $500,000 to keep their doors open," Brinkley said.
Busch said bringing Maryland's taxes into line with other states' is a matter of fairness and economic development.
"The one glaring tax that was out of step with almost everybody else in the country except New Jersey is the estate tax," he said. He said the bill would have a more positive effect than cutting the state's corporate income tax — another idea that was widely discussed at the start of this year's session.
"Our corporate income tax is very competitive," Busch said.
In recent years, many states have reduced or repealed their estate taxes — dubbed the "death tax" by Republicans. According to the Maryland Department of Legislative Services, about 20 states have estate or inheritance taxes.
Miller, who noted that he had fought to retain the estate tax in the past, said he concluded that with other states eliminating theirs, Maryland needed to follow suit.
"It's just another tool in the tool box" of economic development, he said Thursday. Reducing the estate tax "encourages people to stay" and be philanthropic, he said.
However, one Democratic candidate for governor, Del. Heather R. Mizeur of Montgomery County, said the legislation gives a tax break to millionaires while the middle class faces budget cuts.
"This is a great test of the O'Malley-Brown administration's priorities," she said. "If the governor signs this bill into law, then it's clear we need fundamentally different leadership."
The legislation extends to all wealthy Marylanders — an exemption that the General Assembly gave to farmers in 2012, when it raised the floor for their estates to $5 million. Budget analysts estimate that about 1,100 estates must pay the tax each year in Maryland. When the exemption increase is fully implemented in 2019, the number would drop to about 200.
Until a decade ago, the state exemption level was at least partly aligned with the federal floor. But in 2004, the General Assembly decided to "decouple" the state and federal exemptions to maintain Maryland's revenue levels.
Supporters of the bill contend that wealthy Marylanders are retiring to other states that either do not have estate taxes or have higher exemption levels.
Among surrounding states, Virginia and West Virginia have no estate or inheritance tax. Pennsylvania has an inheritance tax with a top rate of 15 percent and no exemption. Delaware has an estate tax with the same top rate of 16 percent as in Maryland but an exemption matching the federal level. The District of Columbia's estate tax is similar to Maryland's current law.
Baltimore Sun reporter Timothy B. Wheeler contributed to this article.Copyright © 2014, The Baltimore Sun