When Walmart founder James L. Walton died in 1995, the state of Arkansas enjoyed a windfall.
Walton’s fortune was $1.65 billion. The next year, state estate tax earnings rocketed by 425%. And today, when fortunes are getting bigger, the estate tax prize is growing too. Researchers at the University of California and the San Francisco Federal Reserve estimate that if Jeff Bezos died today, the state of Washington would reap $12 billion in estate tax. The state’s entire budget for two years if $52 billion.
The thing about state estate taxes though, is that the wealthy can simply move to another state offering a better deal. If Bezos had moved to California before he died, his estate would have been safe from the taxman.
The study mentioned above noted that the main drawback of estate taxes is that the rich will counter the tax man with all types of defenses – charitable bequests, trusts, creative valuation and even fleeing their home state. The older people get, the less likely they are to keep on living in states with high estate taxes. Nonetheless, over the long run the estate tax can be useful. Our study indicated that states with estate taxes raised more money from the taxes than they lost in income tax revenue from fleeing fat cats.
The Democrats are talking about taxing the ultra-wealthy, although the party isn’t in lock-step on the issue. But even those who are hesitant are more amenable to federal estate and gift taxes. They believe such taxes could be applied more broadly and aggressively. Federal estate taxes aren’t escapable, since even Americans who move out of the country are still liable for taxes.
It used to be that the wealthy weren’t forced to flee their home states. Before 2001, the federal government offered a tax credit to cover state taxes. A lot of states had estate taxes equivalent to the credit. But after the tax cuts of 2001 phased out the credit, state taxes started to matter, hence the flight of the wealthy to lower tax states.
For more on state estate taxes, please see:
Estate Tax Can Pay Off for States, Even if the Superrich Flee | New York Times