The effort to expand Maine’s estate tax, more aptly known as the “death tax,” was dealt a blow this week, but the issue is likely to be a perennial focus of progressives throughout Governor Mills’ tenure as they seek to raise taxes on the wealthiest Mainers.
The estate tax, which is collected when property changes hands after the owner’s death, currently kicks in at $5.7 million in Maine. Under Governor LePage, lawmakers repeatedly raised the exemption threshold, imposing the tax on a smaller, richer slice of the population.
Democratic lawmakers, backed by the Maine Center for Economic Policy, are eager to roll back the reforms of the LePage era. So let’s review why the estate tax is fundamentally misguided.
The estate tax penalizes thrift. Take two people who each make $500,000 per year over their careers. The first adopts an opulent lifestyle complete with sports cars, lavish trips abroad, and villas in three different countries. The other lives modestly and accrues a $20 million fortune for their children and grandchildren. When both workers die, the one who exercised frugality will wind up paying more in estate taxes. The estate tax inherently punishes careful financial management and encourages the dissipation of wealth.
These incentives bleed into the rest of the economy. By discouraging saving, the estate tax reduces resources that could have been used to expand business operations or hire new workers. Instead, that money is spent by people who prefer to use their money now than invest it knowing the government will take a hefty slice down the road.
The negative economic effects of the estate tax on family-owned businesses — especially farms — are even direct. Even though the business’ assets on paper push the value of the estate above the tax threshold, that doesn’t mean the family has the resources on hand to pay the estate tax. Nearly all of a family-owned business’s revenues are commonly reinvested in new workers or equipment, leaving little cash left over. To pay the estate tax, the business may need to let employees go, downsize operations, or even shut down.
The estate tax is also problematic from the standpoint of basic fairness, since it is typically imposed on assets that have already been taxed in a different way. A person who pays sales taxes on a valuable art collection or payroll and income taxes on saved wages may still have to pay the estate tax on these assets. Opening the door to double taxation is a dangerous precedent.
The estate tax also creates a great deal of inefficiency in the tax code. Avoiding the estate tax through accounting contortions and strategic residency changes has become a cottage industry. Some experts even estimate that the federal estate tax’s compliance costs are so onerous on the economy that its repeal would lead to a net increase in tax revenue by spurring more private-sector investment.
Financial advisers openly warn that expanding Maine’s estate tax could trigger a hemorrhage of wealthy taxpayers to the 35 other states (including New Hampshire and Florida) without estate taxes. Even left-leaning states like Delaware and New Jersey have recently repealed their estate taxes, and New York is raising the exemption to mitigate its effects.
Retaining wealth and attracting seasoned professionals are some of Maine’s biggest challenges. They’ll only grow more difficult if the estate tax is expanded.
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