Estate tax drains capital, donations from state

February 18th, 2011 Posted in Ohio Estate Tax

By Dick Patten

The Buckeye State has an opportunity this year to join a growing list of states that have reformed or eliminated a tax provision impeding business expansion and job growth: the estate tax.

Bipartisan legislation called the Ohio Estate Tax Repeal Act (House Bill 3) might cost the state Treasury a small amount of money in the short run, but it will pay huge dividends in the long run. Keeping the tax alive means slower economic growth, fewer jobs, less business expansion and the continued flight of some of Ohio’s most productive (and charitable) citizens to states with less-punitive taxes.

Ohio can’t afford to lose any more employers, workers or taxpayers, or the tax revenues they generate.

At 9.6 percent, Ohio’s unemployment rate remains one of the highest in the nation. Gross state product continues to plummet, declining by 2.7 percent between 2008 and 2009, compared with the U.S. average of 2.1 percent. From 2007-09, Ohio lost more than 1,000 manufacturers.

While the estate tax – a looming threat to every successful family-owned business and virtually every family farm in the state – is not the sole cause of Ohio’s woes, it uniquely discourages investment, small-business growth and job creation.

Research by the American Family Business Foundation, for instance, found that on a national level, repealing the federal estate tax would add up to 1.5 million new jobs across the country, nearly 60,000 of which would be in Ohio, according to the Buckeye Institute. State estate taxes have the same negative effect.

Research also shows that state death taxes are the wrong way to raise revenue. A Connecticut Department of Revenue study, for example, found that states without estate taxes produced twice as many new jobs and their economies grew nearly 50 percent more from 2004 to 2007 than states with such taxes.

Because investment capital – and the people who own it – is highly mobile, people whose estates are large enough to trigger the estate tax often move to states that don’t have such taxes.

According to the Connecticut study, the estate tax was the leading cause of outmigration from the state. The highest number of those leaving the Nutmeg State during the period studied – 30,000 – moved to Florida, a state that is constitutionally barred from imposing a death tax. Those leaving Connecticut had an average estate of $7.5 million, the study found.

Connecticut is not alone. A 2011 Rhode Island study, using Internal Revenue Service migration data, shows that the Ocean State lost some 100,000 residents to Florida between 1991 and 2009, ultimately costing the state nearly $1 billion in lost capital. Rhode Island’s estate tax was given as one of the main factors.

As onerous as Connecticut’s and Rhode Island’s estate taxes are, they are generous compared with Ohio’s. Ohio taxes any estate larger than $338,333. This is less than a tenth of Connecticut’s $3.5 million estate-tax exemption and less than half of Rhode Island’s $859,350 exemption

State estate taxes cause yet another negative unintended consequence: They hamper charitable contributions, hurting those who rely on the nonprofits that charitable contributions support.

A study by the Boston College Center on Wealth and Philanthropy found that high-net-worth individuals would increase their bequests to charity by as much as 50 percent if they did not lose so much of their estates to taxes. This has a particularly damaging impact on charity because high-net-worth individuals are responsible for nearly two-thirds of all charitable giving, according to a Bank of America study.

The evidence is clear: The death tax, while contributing modestly – just 0.3 percent or $300 million – to state revenues, is a net loser.

A better way forward is for Ohio to encourage long-term, sustainable growth by repealing the state estate tax. Any short-term revenue loss will be more than offset by higher long-term growth and the sales, income and other taxes that growth brings.

Dick Patten is president of the American Family Business Institute, an organization representing family businesses and farmers fighting for death tax repeal.

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