Ohio's Estate Tax Should Go
Ohio is one of only thirteen states that levies an estate or inheritance tax of its own. The remaining 37 states "piggy back" on the federal estate tax by taxing only up to the amount of the federal estate tax's "state death tax credit." In these states, the estate tax is essentially free to the taxpayer since it merely moves some of the federal estate tax liability to the state level while leaving the total estate tax bill unchanged.[1]
The problem is that the federal estate tax's "state death tax credit" is scheduled to be eliminated next year and will remain so for at least five more years. During this time, Ohio will count itself among the few states to tax estates at all.[2] In 2005, a $5 million estate, about the size of a family business perhaps, will face an estate tax bill in Ohio of over $300,000 compared with zero in most other states.
Why should we care? After all, the state surely has important things it would like to do with this estate tax revenue. The problem in a single word is: mobility. When faced with the prospect of a higher estate tax bill in Ohio than in say Florida, we can expect some people to move to Florida or to one of the other 37 states whose estate tax is also scheduled to disappear.
Are people this rational? Will they actually pick up stakes and move to avoid estate taxation? There is ample anecdotal evidence that elderly people are moving for exactly this reason and there is now some statistical evidence. Jon Bakija of Williams College and Joel Slemrod of the University of Michigan find that the number of estate filings in each state is "highly elastic with respect to state inheritance and estate tax rates." They conclude, "This seems to support the notion that high-income people tended to move to states with tax systems that were more favorable to them as they grew older."[3]
The irony is that as people leave the state before they die or undertake other forms of tax avoiding "estate planning", the state losses out on other forms of tax revenue such as income and sales taxes in the meantime. There is a growing consensus that estate taxes may not even represent any net tax revenue to the government. Stanford University economist Douglas Bernheim questions whether the federal estate tax generates any net revenue.[4] If there is any question about the federal estate tax, where mobility is much less of a concern, then surely there is grave doubt about whether state estate taxes actually raise any money.
Many advocates of estate taxes argue that such taxation is needed in order to prevent the rich from passing on their wealth to their heirs thus accentuating income inequality. But the empirical evidence shows clearly that the estate tax has little impact in equalizing the distribution of income or wealth in society.[5] Economists Alan Blinder and Joseph Stiglitz, both former Clinton appointees, argue that the estate tax is ineffectual as a tool to fight income equality.[6] Blinder once wrote, "Estate taxation is not a very powerful weapon in the egalitarian arsenal…The reformer eyeing the estate tax as a means to reduce inequality had best look elsewhere."[7] Recent research actually tends to conclude that bequests actually make the distribution of wealth more equal.[8]
The estate tax is costly in another way. If you open any phone book listing under accountants you will see pages of advertisements for estate tax planners. How much wasted time and money are the people of Ohio spending trying to work the system to reduce their estate tax liabilities? How many bad investment decisions are driven by estate tax complications?
So we can conclude that the Ohio estate tax is a contributing cause of out migration, that it raises little or no revenue and perhaps even costs money, that it does not improve income equality, and it is a massive accounting headache for Ohio's citizens. If most of the states of the United States can survive without a stand-alone estate tax, then surely Ohio can too.
Footnotes:
[1] For more information about the relationship between the federal estate tax and state estate taxes see, Robert A. Lawson, Making Sense of the Ohio Estate Tax, Columbus, Ohio: The Buckeye Institute for Public Policy Solutions, 2001.
[2] Several states have considered adding a "stand alone" estate tax provision in order to keep this dwindling source of tax revenue, but this author is unaware of any that have actually done so.
[3] Bakija, Jon and Joel Slemrod. "Evidence on the Impact of Progressive State Taxes on the Locations and Estates of the Rich." Working Paper, 2002. Cited with permission.
[4] Bernheim, Douglas B., "Does the Estate Tax Raise Revenue?" in Tax Policy and the Economy, Vol. 1, edited by Lawrence H. Summers (Cambridge, MA: MIT Press, 1987): pp. 113-138.
[5] It is not at all clear what the optimal amount of economic equality is. Perfect equality, with its attendant incentive problems, is certainly sub-optimal.
[6] See "The Economics of the Estate Tax," Joint Economic Committee Study, December 1998, pp. 3-10 for an excellent review of the philosophical and empirical arguments related to economic equality.
[7] Blinder, Alan S., "Inequality and Mobility in the Distribution of Wealth," Kyklos 29 (1976): 618-9.
[8] See Wolff, Edward N., "Inheritances and Wealth Inequality, 1989-1998," American Economic Review 92 (2002): 260-64; and Gokhale, Jagadeesh and Laurence J. Kotlikoff, "Simulating the Transmission of Wealth Inequality," American Economic Review 92 (2002): 265-69.
Robert A. Lawson, Ph.D. is Professor of Economics and George H. Moor Chair at Capital University in Columbus, Ohio and a Senior Fellow with The Buckeye Institute.
