A whopping $80.7 billion of 2001 Forbes 400
wealth escaped state estate taxes because billionaires moved to states without
estate taxes through 2017, according to estimates from a new National Bureau of
Economics research paper. Billionaires avoiding taxes, that’s a given. But the
surprise finding is this: The revenues states can bring in from death taxes
outweigh lost income taxes from the rich who flee. That’s significant because
the case for taxing billionaire’s estates at death could be used to call for
more broad-based state death taxes, even in states that don’t impose them
today.
The paper, Taxing Billionaires: Estate
Taxes And The Geographic Location Of The Ultra-Wealthy, was written by
Enrico Moretti, a professor of economics at University of California, Berkeley,
and Daniel J. Wilson, a senior economist with the Federal Reserve Bank of San
Francisco.
First a little background. The states impose
their own state-level estate taxes, levied on your accumulated wealth at death,
separate from the federal estate tax. (Not to be confused with the wealth tax presidential
candidates Elizabeth Warren and Bernie Sanders have proposed.) Before 2001,
there was a federal credit for state-level taxes, so your state of residence
didn’t change your combined federal/state tax bill. The Bush tax cuts of 2001
eliminated the credit, and state estate taxes suddenly became significant. So
the authors could look at where billionaires lived before and after the 2001
law change, whether they chose a state with a 16% or 20% estate tax or a state
with no tax.
Billionaires are “keenly sensitive” to the
variation in state estate taxes and tend to leave states with an estate tax for
a state without an estate taxes, especially as they grow older, the authors
found. Still, for most states, the benefit of additional revenue from an estate
tax significantly exceeds the cost of foregone income tax revenue due to
billionaires leaving the state (by 31%). The authors break this cost-benefit
analysis down state by state; their conclusions could impact how your state
taxes the rich at death. (Today, 17 states plus the District of
Columbia impose death taxes.)
Age makes a difference. The authors found that
older billionaires (65 and older), compared with younger billionaires, are less
likely to live in a state that imposes estate taxes after 2001. The authors
also looked at individual-level moves. By 2010—9 years after the law change—21%
of billionaires who originally were in an estate tax state had moved to a state
with no estate tax, while only 1% of individuals who originally were in a state
with no estate tax had moved to an estate tax state. Of older billionaires,
43%— a “remarkably high fraction”—who originally were in an estate-tax state
had moved to a state with no estate tax, while none of those who were
originally in a no-estate-tax state lived in an estate-tax state by 2010.
Next, the authors look at the cost-benefit
analysis for states. Should estate=tax states repeal estate taxes? Should
non-estate-tax states adopt estate taxes? The cost-benefit ratio varies greatly
across states due to the variation in state income tax rates. For New York,
with 71 billionaires, the expected present value of having an estate tax,
computed over the expected remaining lifetimes of the 2017 Forbes 400, is equal
to $5.2 billion, the authors calculate.
Of the 28 states that don’t have an estate tax
and have at least one billionaire, 27 states could increase their revenues if
they adopted estate taxes. For example, Florida with 35 billionaires, and
Texas, with 34 billionaires, both no-income-tax states, would gain $7.7 billion
and $7 billion respectively (computed as present value) if they adopted an
estate tax. California is the one exception—because of its high-income tax
(with a 13.3% top rate), it would lose $8 billion in revenue if it adopted an
estate tax.
Finally, the authors look at the cost-benefit
of an estate tax on the merely wealthy—individuals with more than $5.5 million
in net worth at death (the federal estate tax threshold in 2017). The upshot:
In most states, the benefit of an estate tax kicking in at that level exceeds
the cost of giving up income tax revenue; and if wealthy taxpayers move less in
response to taxes than billionaires, the case for a broad state estate tax is
stronger.
Here’s an example from the paper of how much
of an impact one billionaire’s death can have on state estate tax revenue. The
authors found that there was a large increase in state estate tax revenues in
the three years after a Forbes’ billionaire’s death: on average,
$165 million (from 1982 through 2017). The average tax rate: 8%.
Courtesy of Enrico
Moretti and Daniel J. Wilson
NBER
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