REVIEW & OUTLOOK
Estates of Pain
Connecticut's governor to constituents: Get out of here before you die!
Florida Governor Jeb Bush ought to send his counterpart in Connecticut, Republican Jodi Rell, a thank-you note with a box of chocolates and a ribbon tied around it. Last month Ms. Rell marked her first anniversary as Governor by signing into law a tax bill that might as well be called the "Palm Beach Economic Development Act."
The law requires that any resident of the Nutmeg State with an estate of more than $2 million pay a death tax of up to 16%--merely for the privilege of dying in Connecticut. The legislators in Hartford hope that the tax will raise $150 million in revenue each year--money that will come in only if the legislators in Hartford are also planning to build a Berlin Wall around the state.
Otherwise, expect a stampede of retirees and family businesses out of Connecticut into the many states without a death tax, such as Florida, which has a constitutional prohibition against estate taxes. Thanks to the Connecticut death levy, a successful small business owner with a $10 million estate can save about $1 million by packing up and heading south.
There are already thousands of high-income Connecticut residents with second homes in Florida or other warm-weather Southern states, so changing domiciles is easy and relatively costless. "The Connecticut legislature can't seem to comprehend that it is taxing away the very wealth-producing people that this state is dependent upon for an economic revival," says economist Dowd Muska of the state's Yankee Institute think tank.
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In Washington state, Democratic Governor Christine Gregoire, riding high on her disputed 186-vote victory in last November's elections, linked arms with the Democrat-controlled legislature and overturned a ballot initiative approved by 67% of voters in 1981 that had outlawed a state estate tax. Now Washington imposes a 19% death tax, among the most onerous in the nation.
Until recently a federal estate tax credit allowed states to offset death taxes of up to 16%. In 2001 that credit was replaced with a much less generous tax deduction, which will fall in value as the federal estate tax is phased out. In other words, state death levies aren't free or painless any longer, and Congress is expected to go further and vote on permanent repeal in September. Even if permanent repeal fails, a new lower federal rate of 15% may well be enacted.
Polls indicate that about two of three Americans support death tax repeal because they believe correctly that this is an unfair double tax on income. And since Americans build up estates in part so that their legacies can be left to their children and grandchildren--and definitely not to politicians--seniors with medium and large estates are likely to shop around for low tax venues.
A 2004 National Bureau of Economic Research study--"Do the Rich Flee From High State Taxes?"--finds that states lose as many as one of three dollars from their estate taxes because "wealthy elderly people change their state of residence to avoid high state taxes." And that was when states imposed effective estate tax rates that were only one-third as high as they are enacting now. Under these new soak-the-rich schemes, some states could lose so many wealthy seniors that they may actually lose revenue over time.
Not surprisingly, it is generally the liberal, tax-and-spend blue states that are frantically reinstating punitive taxes on death. Will they ever learn? Over the past 20 years about 1,000 people every day have been fleeing these high tax blue states, for low tax red states. It's one reason the Northeast has suffered economically, and declined politically in terms of electoral votes.
In New York, about one in three tax dollars comes from those with earnings of $1 million or more. A rational policy out of Albany would be to lay down a red carpet to encourage more rich people to move in, or at least to stay there. Instead, with its 16% estate tax, Republican Governor George Pataki has effectively declared: "Invest anywhere but in New York." And that's why you can expect to see thousands of creative people from the Northeast whistling Dixie in the months and years ahead.
