Until a dozen years ago, New York had plenty of company on estate taxes. All 50 states had one.

But when the federal government ended its credit for non-federal estate taxes, things began to change. By the end of 2013, New York was one of only 14 states with an estate tax. And only two states had an exemption less than the $1 million excluded here.

No wonder, then, that New York has been seen as an expensive place to die—and that the estate tax was reason enough for some wealthy New Yorkers to leave.

To his credit, Gov. Andrew Cuomo decided to do something about this. As reporter Thomas Adams describes in this week’s Special Report, the recently approved 2014-15 state budget contains some big changes to New York’s estate tax.

Chief among them is a phased-in increase in the exemption, starting with a boost to $2,062,500 as of April 1, 2014, and climbing to the current federal exemption level of $5,250,000 on April 1, 2017. As of Jan. 1, 2019, the New York exemption will be indexed for inflation in a manner conforming to the federal exemption.

This will close the big gap between the New York and federal exemptions. But will it be enough to sway wealthy New Yorkers who are drawn to other states? 

In some cases, yes. State data analyzed by the Empire Center for Public Policy show that in 2012-13, more than 3,000 taxable estates had values of $1 million to $5 million; once fully phased in, the new changes would spare such estates from any tax.

But for those valued at 105 percent or more of the exemption, the tax will apply to the entire estate (unlike the federal tax, which applies only to the amount exceeding the exemption). This “cliff” in New York is not new, but it should have been eliminated.

Another problem with New York’s estate tax is its lack of “portability,” which would allow the surviving spouse to apply any leftover exclusion to his or her own estate. Again, that’s how the federal estate tax works, and New York’s should be the same.

And why set the tax rates—which top out at 16 percent—for only one year?

These flaws can and should be fixed. Until they are, New York will continue to give some of its wealthiest residents too many reasons to leave.

© 2014 Rochester Business Journal