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Legislature starts debate over leadership's estate tax idea

Sean O'Neill said Maryland's estate tax is the cherry on top of a heaping scoop of taxes that some of his clients can't stomach.

The Annapolis certified financial planner said none of his clients have left the state solely because of the "death tax." But they do view it as an unnecessary burden, O'Neill said.

Maryland's tax is imposed on the transfer of property from the estate of the deceased, if that estate is greater than $1 million for an individual or $2 million for a married couple. The rate is as high as 16 percent.

The federal government taxes only estates worth more than $5.34 million.

The discrepancy led to Forbes magazine including Maryland in a story titled "Where not to die in 2013."

Maryland is one of two states that impose both estate and inheritance taxes.

The state's income tax rate of 5.75 percent, combined with county piggyback taxes that can go up to 3.2 percent, gave it the third-highest per person income tax collections in 2010, according to the calculations of the Tax Foundation, a nonpartisan tax policy research firm based in Washington, D.C.

The Tax Foundation also said the state's property taxes are the 17th-highest in the nation and its corporate income tax rate is the 14th-highest.

Now, with an election coming in November, state lawmakers are considering proposals to give taxpayers a break.

Legislators say the one likeliest to pass concerns the estate tax, and is from state Senate President Thomas V. Mike Miller Jr., D-Calvert, and House Speaker Michael E. Busch, D-Annapolis. Busch and Miller have proposed "recoupling" the level at which the state imposes taxes to the federal threshold: $5.34 million.

That sounds "prudent," said O'Neill, an associate vice president at RBC Wealth Management.

He said while $1 million may sound like a lot of money, it's "very common" for Anne Arundel County residents to wind up with that much.

"Between the value of your house, your retirement plan and your other assets, you could be over the $1 million threshold pretty quick," O'Neill said.

Addressing the Maryland Economic Development Association in January, Miller and Busch said Maryland should realign its estate tax at the federal level for the first time since 2001.

But other legislators say a state still trying eliminate a structural deficit can't afford the lost revenue.

The Department of Legislative Services projects that in fiscal 2014 the state will get $152.7 million in revenue from the estate tax and $50.6 million from the inheritance tax.

Busch and Miller's proposal on the estate tax, the DLS estimates, would cost Maryland $27.9 million in fiscal 2015, with losses going up in each succeeding year and reaching $137.7 million in fiscal 2019.

The state can't afford this, Terrence Cavanagh, executive director of Service Employees International Union Maryland, told the House Ways and Means Committee on Tuesday at a hearing on other legislation affecting estate and inheritance taxes, not the Miller-Busch proposal.

"The proponents of this legislation," Cavanagh said, "claim that revenues will increase because fewer Marylanders will leave the Free State before they die. And I suppose logic follows that many who have left would come back and spend their last days in the closest place to Paradise this side of the grave."

But higher taxes on those classed as wealthy can backfire, said Ted Toal, a partner at Rockwood Wealth Management in Annapolis.

Looking at the effects of the increased tax on millionaires advocated by Gov. Martin O'Malley, the legislature found that in 2012 the state had more than 5,000 millionaires of all ages with an average taxable income of $2.6 million - but this was significantly less than the 6,899 millionaires in 2007.

Raising the estate tax exemption, Toal said, would mollify clients who view the state's many taxes as burdensome.

Toal said tax advisers, himself included, already use disclaimers in case the law changes. They wouldn't need to change their clients' estate plans, he said.

The level at which the estate tax currently kicks in is "really not much money in this state in this day and age, so it really is a large burden for people," Toal said.

Del. Pam Beidle, D-Linthicum, a life insurance agent, said she'd like to restore the estate tax exemption faster than the four-year phase-in Busch and Miller proposed.

Many high earners do their work in the state but claim residency elsewhere to avoid Maryland's taxes, Beidle said.

"I do think people are leaving Maryland over the estate tax," she said. "And that's a shame."

Hearings have not been scheduled for Busch and Miller's estate tax legislation, filed as House Bill 739 and Senate Bill 602. Similar bills have also been filed in the House and Senate.

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