2:28 PM EST, January 16, 2014
Last week, the two top leaders of the Maryland General Assembly expressed interest in reducing the estate tax for the heirs of wealthier residents. It's an idea that's been trotted out before, usually by Republicans, and it seldom gets very far in Annapolis.
But this year appears to be different. House Speaker Michael E. Busch and Senate President Thomas V. Mike Miller have endorsed a plan to gradually increase how much of a deceased person's estate can be shielded from Maryland's estate tax from $1 million to $5.25 million. That would put it in line with current federal standards.
Why the change of heart? Conservatives have long pointed to the estate tax — Maryland's is among the highest in the nation — as a strong incentive for wealthy seniors to move elsewhere. But the evidence for this affecting behavior is scant and, as a recent study by Phoenix Marketing International noted, there's still plenty of rich to go around — Maryland has the highest number of millionaires per capita in the nation at 7.7 percent of total households. (That's more than a percentage point above neighboring Virginia and the District of Columbia).
Rather, this appears to be a classic Annapolis trade-off. Poised to raise the state's minimum wage this session, lawmakers are looking for a tax cut to balance out the political equation — perhaps something to please the upper classes who are far more likely to pay minimum wage salaries than earn them. Thus, incumbents will have something to brag about at Chamber of Commerce luncheons as much as Progressive Maryland rallies.
The estate tax change may be appealing because it's relatively affordable. According to a 2013 study by the Department of Legislative Services, it would cost the state about $81 million in lower tax revenue — or less than one-third of last year's slot machine take. Tax-cutting options like reducing the sales tax by a penny or eliminating the corporate tax would be far more costly.
The best argument for lowering the estate tax is fairness and simplicity. A majority of states either don't have an estate tax or conform to federal standards. The worst is economic hardship. According to the DLS study, only about 2.8 percent of Maryland adult deaths result in any estate tax being paid. That's likely because in addition to the $1 million deduction, there are numerous loopholes to reduce an estate's exposure — the spousal exemption, a break for farmland, irrevocable life insurance trusts, transferring assets through sales and loans rather than inheritance and on and on. Rarely does the Maryland Comptroller's office have to impose a lien to collect estate taxes.
In other words, people who are paying big bucks in estate taxes are either extremely rich or the deceased didn't do much estate planning. Again, by the DLS study, a taxable estate of between $1 million and $1.5 million (a category that represented 38 percent of those subject to Maryland's tax in 2008) paid about 3 percent in estate and inheritance taxes. Even the high-end estates paid taxes averaging about 5 percent overall.
This week, Gov. Martin O'Malley declined to endorse the tax cut proposal, saying he favors "what works" and "what's fiscally responsible." What proponents should be asking themselves is not whether reducing the estate tax would be welcomed by beneficiaries (it obviously would) but whether this ought to be Maryland's highest tax-cutting priority.
Tax cuts, like new spending on expanded pre-K schooling or anything else, ought to be paid for. If there is room in the state budget for an $81 million reduction in tax revenues — and there may well be as the economy improves — then tax cuts that create jobs, encourage growth and improve Maryland's business climate ought to be a top priority.
Why not, for instance, reduce taxes on businesses that are hiring? Why not expand tax credits aimed at poor neighborhoods or reviving manufacturing? Why not give breaks to small business owners who file as sole proprietorships or S corporations and end up paying some of the highest marginal tax rates in the nation?
Any of these would seem more urgent than reducing tax rates on affluent people who are poised to receive hundreds of thousands of dollars in inheritance. That's not to suggest heirs don't have a beef, it's just that they ought to get in line. The need for election year "goodies" ought to take a back seat to fiscal responsibility and looking out for Maryland's economy.
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