TAX ALERT | January 13, 2023
Authored by RSM US LLP
Executive summary: New York estate tax repeal proposal
New York Senate Bill 670, introduced on Jan. 5, 2023, would repeal the state’s estate tax. The bill has been referred to the Senate Budget and Revenue Committee. It would become effective upon enactment.
Article 26 of the New York tax code imposes an estate tax on residents upon their death. The gross estate for purposes of the tax begins with the federal gross estate located in New York. For the 2022 calendar year, the state allows a “basic exclusion” amount of $6,110,000, a figure adjusted annually for inflation. However, the basic exclusion is not allowed for estates that exceed the basic exclusion amount by more than 5%, i.e., estates totaling more than $6,415,500, or the basic exclusion amount plus $305,500. Taxable estates valued at under $500,000 are taxed at 3.06%. The tax rates increase with the value of the estate in 14 additional tax brackets. The top bracket imposes a 16% tax on taxable value of $10,100,000 or more.
Currently 11 states and the District of Columbia impose estate taxes with varying exemptions and threshold amounts: Connecticut, Hawaii, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont and Washington. Five states impose an inheritance tax: Iowa (phasing out), Kentucky, Nebraska, New Jersey and Pennsylvania. Maryland imposes both an estate and an inheritance tax.
RSM’s Washington National Tax State and Local Tax (SALT) group weighs in on the New York proposal and estate taxes in general.
Interesting proposal, but…it is New York. Even if by some miracle this proposal passes, there will be consequences. Understand that state taxes are a three-dimensional web of separate and distinct systems that take a piece of the same money over and over again in different ways.
Over the course of our lives, my wife and I have made some money. On that, we paid income taxes. Some of the money we already paid income tax on, we have spent. Much of our spending was subject to sales tax, and some of it resulted in the purchase of property subject to a variety of property taxes. When my wife and I die, the value of anything left that is not subject to an exemption may be subject to an estate tax, depending upon where we live. However, for the estate tax there’s a somewhat morbid relief valve. Our children will not be subject to income tax on their inheritance. The estate tax and the income tax exemption for inheritances are inherently tied together. Repeal the estate tax to relieve horizontal inequity issues, and the key justification for the income tax exemption for my children goes away.
In fact, where there is no estate tax, some may argue that imposing income tax on inheritances is imperative because the exemption unfairly favors unearned income in the hands of the recipients. Whether I agree or disagree with this argument is irrelevant. What matters is that people understand that you cannot look at state taxes in a vacuum. The ties that bind each part of a state’s revenue system together make it difficult to implement one policy, good or bad, without impact throughout the web.
I do not think this bill will pass. But I think it should.
There are many philosophical and political reasons to support – and oppose – estate taxes. I am in the opposition camp. I believe estate taxes are rooted in the politics of envy. Some in society hate the idea that others have more money, more cars, more vacations and nicer wristwatches. I do not care how much money you have, and I do not believe society should care either. I also do not care who you give your money to when you die. It is your money, after all. As an aside, I have no dog in this fight. Barring a lottery win, I will probably never pay any estate tax. I come from a long line of people who have neither endured great poverty nor enjoyed vast wealth. Yet I don’t get the desire to punish the latter.
But forget political philosophy. There is a very strong policy reason for repealing state estate taxes. They do not work. First, state estate and inheritance and gift taxes raised about $6 billion in 2021. That is about .005% of total tax revenue. Why so little? Wealthy people move to avoid death taxes. That is a fact – ask any estate tax lawyer. States get lucky sometimes and some rich folks fail to do the right kind of planning. Moreover, there have been studies that show that estate taxes actually cost states money. When wealthy people leave because of the estate tax, they end up paying income and sales taxes to other states.
There is a reason why so few states impose estate taxes. They do not work.
Egad, the estate tax is as controversial today as it has always been. Here are some things I know to be generally true about the estate tax. Whether federal or state, there are few estates subject to the tax, relatively speaking. On a purely numbers basis, most estates will be excluded. I also know that for those estates subject to the tax, a good accountant and lawyer, and perhaps some bad ones too, can quite easily develop strategies to mitigate estate taxes. I say “quite easily” in jest because, even as a non-estate tax practitioner, I still remember those strategies from law school almost 20 years ago. It should be obvious there is a lot of nuances in estate planning and every family will have remarkably different goals. That said, whether taxes can be mitigated through planning should not be a reason why they should not exist – if so, my industry is in trouble (hint: it is not). It is important to analyze policy goals and make adjustments as needed to create a fairer tax system. That includes amending or repealing bad taxes.
State budgets have been flush the last few years thanks to pandemic relief and inflation, although we are beginning to see the cracks as we look to FY24. Several large states are quickly turning to shortfall positions after consecutive years of surpluses. While New York’s tax may only generate a small amount of revenue, its existence could have particular consequence in the next year. Whether or not the bill progresses (let us be honest and admit it is dead on introduction), there is an important conversation around state estate taxes and how they could play into overarching policy goals – we just need to have it first.
This article was written by Brian Kirkell, David Brunori, Mo Bell-Jacobs and originally appeared on 2023-01-13.
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