The Dilution of State Estate Taxes Spells Trouble for Tax Fairness

The Institute on Taxation and Economic Policy published a report on Monday highlighting a disturbing trend that’s made inroads even in solidly progressive states over the past year: the weakening or complete dismantling of state estate taxes. Three states – Indiana, North Carolina, and Ohio – repealed their estate or inheritance tax in 2013, bringing the total number of states still maintaining their own estate or inheritance tax down to only 19, plus the District of Columbia. Seven other traditionally Democratic states plus D.C. sapped the potency of their tax, either seeing their exemption levels increase in 2013-2014 or passing legislation calling for future increases.

In an era when a dense economic treatise on inequality tops the New York Times bestseller list, developments like these threaten efforts to mitigate a troubling degree of wealth concentration in the United States (the wealthiest 1 percent of American households owned 35.4 percent of the nation’s wealth in 2010) – efforts made all the more important in the realm of regressive state taxation. The estate tax helps to prevent intergenerational transfers from clustering large amounts of wealth in the hands of a few – a phenomenon which has negative implications for equality in the democratic process. States’ recent changes to the tax undermine that purpose and further shift the cost of government onto lower-income taxpayers.

Two of the states (plus D.C.) taking steps to increase their exemption thresholds plan to match the federal per-spouse exemption by 2019 or later, which will top $6 million. Calling this exemption level high by historical standards is a bit of an understatement, and states adopting it effectively exempt many very wealthy households from estate taxation. The five other states raising their exemption thresholds in the past year are moving in the same direction, seeing exemption levels as high as $2 million-$4 million. This means that the overall state tax levy shifts even more toward the low- and middle-income households who already pay a higher share of their income in state taxes. And the fact that predominantly progressive states are making these changes is a step back particularly for places like D.C., which passed smart tax reform this year when it expanded its Earned Income Tax Credit.

Outright repeal in Indiana, North Carolina, and Ohio came on the heels of other ill-advised tax “reforms.” Indiana Governor Mike Pence authorized a sudden repeal of that state’s inheritance tax last year, which had been scheduled to phase out by 2022. ITEP ranked Indiana among the 10 most regressive tax states in last year’s “Who Pays?” report. The elimination of the inheritance tax will compound the fairness issue in a state which recently passed income and corporate tax cuts whose benefits will overwhelmingly accrue to wealthy taxpayers. North Carolina and Ohio similarly passed large income tax cuts last year in addition to their estate tax repeals, with North Carolina also eliminating its Earned Income Tax Credit.

All of these states would do well to heed this simple truth: failing to address large inequities in wealth isn’t good for the democratic process, nor is it good tax policy.