The Death of an Unneeded Tax
In 2010, Ohioans may have a chance to vote for a proposal that has the potential to do more for the state's economy than anything dreamed up by the Ohio Department of Development. The question will be whether to eliminate the state's estate tax (or death tax, as some call it). Of course, if this question makes the ballot, we can count on the very politicians who moan the loudest about the state's poor economy to do everything they can to preserve this job-killing tax.
What is at stake in this vote? State and local politicians will certainly put it in terms of revenue. Ohio's estate tax takes 6% of an estate's wealth over $338,333 and 7% of an estate's wealth over $500,000. The state government gets 20% of the money collected and the county in which the estate is located gets 80%. In 2007, that translates to $72 million for state politicians to spend and $287 million for local politicians to divvy up.
Looking at this in terms of revenue for governments has it a bit backwards, though. For one, this is wealth that was saved by Ohioans who already paid taxes when it was first created. And many of the estates being taxed are from small business owners who spent a lifetime building their business, creating jobs, and paying taxes to federal, state, and local governments. Why does their death give the government the right to take their wealth?
The business owners who would be affected by this the proposed repeal of the estate tax are the key to this proposal's economic development potential. By imposing a tax on the creation of wealth, the estate tax discourages this wealth creation. Some radical egalitarians may think this is a good thing, but it's not just the rich who would benefit from the tax's repeal. Wealth creation means more investment in Ohio, more jobs for the state's workers, and a greater return on investment funds for retirees and those on pensions. In short, everyone in the economy has a stake in stimulating wealth creation.
The notion that certain tax cuts stimulate the economy is something that is not very controversial in the political world. Presidents as diverse as Ronald Reagan, John F. Kennedy, and Bill Clinton have embraced it. Unfortunately, many politicians on the Right have irresponsibly suggested that tax cuts of any sort are good for the economy. Those on the Left, seeing the flaws of this claim, are as equally irresponsible when they dismiss any economic effects from certain tax cuts.
The fact is that if you want entrepreneurs to risk their money and invest and employ more people, policymakers need to reduce the penalties for undertaking these activities. Taxes are a form of penalty, regardless of the fashionable notion held by some politicians that paying taxes is a privilege.
If you want people to invest more, it makes sense to reduce capital gains and dividend taxes. If you want them to work more, then reduce marginal tax rates (which take more and more of your money the more you earn). If you want business owners to hire more people, then reduce payroll taxes. While this isn't a magic formula for economic growth, these types of tax cuts will help produce that growth. The logic is the same with the estate tax.
Only 17 states have an estate tax, so clearly it isn't a necessity for funding vital government activities. Instead of complaining about the revenue they will lose, state and local government officials should be looking at what other states are doing in the absence of an estate tax to fund their programs and services. If most of the nation's governments can get by without estate tax revenue, Ohio's governments can, too.
In fact, if state policymakers reshape the state tax code to stop penalizing economic growth, the state will see more economic growth. A byproduct of that growth is more tax revenue. Repealing the state's estate tax will certainly help the state's struggling business owners. Politicians who are hungry for more tax revenue may even find that this repeal would be good for them, too.
Marc Kilmer is a policy analyst with the Buckeye Institute for Public Policy Solutions, a research and educational institute located in Columbus, Ohio.
