When I wrote a post last December arguing that New York needed to reform its estate tax, a reader wrote to ask just how many residents paid the estate tax. Now the Empire Center has provided the answers and an update on New York’s tax compared with other states, which provides support for aligning New York with federal estate tax rules as Gov. Andrew Cuomo has proposed.
Here’s the history. Until 2001, states could levy a 16% estate tax without worry because the amount was deducted from the federal tax owed. After 2001, the credit was eliminated and the state estate taxes became real money taken from the beneficiaries. Most states acted to eliminate their estate taxes as a result.
Meanwhile, the federal government gyrated on estate taxes, raising the exempt amount, then eliminating the tax altogether, then re-imposing it last year. The feds now tax estates starting at $5.34 million (which adjusts for inflation each year) at the pretty steep rate of 40%.
Today, only 14 states impose any sort of estate tax. New York continues to tax any estate worth more than $1 million with a maximum rate of 16%. The state takes a significant chunk out of any estate worth substantially more than that even when it doesn’t have to pay federal tax. The $1 million exemption is less than seven of those states. Eleven of the 14 states have a top rate of 16%, while Washington’s is higher at 19% and Maine and Connecticut’s lower at 12%.
The result is that in 2012, the federal government imposed the tax on 3,758 estates in the entire country. New York assessed almost 4,000 estates.
The Empire Center report also notes it is important to distinguish between millionaires who have an annual income of $1 million and people who accumulate that amount in a lifetime of hard work. Its analysis suggests there are at least 600,000 households with $1 million in assets in the state.
The crucial question is whether the estate tax causes these people to leave the state when they retire—especially because they have so many places to choose from. Economists are bitterly divided on the issue of how much taxes influence location decisions. However, I know people who have retired elsewhere in part because of taxes and I think you do too.
As for the bottom line: The state raised $1 billion in estate-tax revenue in 2012, a figure that has been declining as a percentage of all revenue for years.
The Empire Center contends the state would benefit from eliminating the tax. That may be. Politically, the most likely—and needed—step is to adopt the Cuomo plan to match the federal exemption and lower the rate to 10%. Anything less than that will continue to send people elsewhere.
© 2014, Crain’s New York Business
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